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Roth 401(k) – Is it Right for You?
By JLP | December 18, 2005
In a little over a week, a new retirement plan option becomes available for workers: the Roth 401(k). If your employer decides to offer the Roth 401(k), should you take advantage of it? The answer depends on when you want to pay Uncle Sam: now or later. Jeff Opdyke addressed these questions in an article titled A New Flavor for Retirement (free) in this week’s Wall Street Journal Weekend Edition.
Younger workers, who are in a relatively low tax bracket now, who expect to be in a higher tax bracket when they retire, will benefit the most from the Roth 401(k). The problem is that it is hard to know just what tax bracket you could face 30 to 40 years down the road. Based on the Federal Income Tax brackets for 2005 (married filing jointly), if you are in the 15% tax bracket, your adjusted gross income is less than $59,400. If those same tax brackets exist when you retire, you would have to have an adjusted gross income of more than $59,400 to push you into the 25% tax bracket. Based on this example, it would be smart to pay taxes now in order to have tax free income during retirement.
One other thing to consider is the fact that a Roth 401(k) can be rolled into a Roth IRA either upon retirement or leaving the company. The advantage to this is that Roth IRAs aren’t subject to mandatory withdrawals like other retirement plans are. This can be particularly valuable to a person who has other assets that can tap during retirement and does not need income from their IRA since the IRA can continue to grow.
I’m sure this is a topic I will be covering in future posts. In the meantime, read the article I referrenced above and then talk to your Human Resources department if the Roth 401(k) is something you are interested in.
Topics: Investing, Retirement Planning, Roth 401(k) | 7 Comments »
December 18th, 2005 at 10:55 pm
Is there a reason that some employers haven’t decided if they plan to provide this 401(k)?
Neo
December 18th, 2005 at 10:57 pm
Neo,
Some employers may elect not to offer the Roth 401(k) due to cost or lack of interest on their employees part.
December 19th, 2005 at 10:34 am
Would the new Roth 401(k) also have different rules than a regular Roth IRA with regards to having to have under a certain AGI to contribute? For example, my wife and I will be close to the $150,000-$160,000 mark for a regular Roth. So, if I could instead put some money into the Roth 401(k) wihtout worrying about this, that would be great.
Also, could I split my contributions between my current 401(k) and the new Roth 401(k) or are the exclusive?
Thanks if you have any additional info.
-RS
December 19th, 2005 at 11:58 am
My company has opted not to offer the Roth 401(k). Dang!
December 19th, 2005 at 1:16 pm
RS,
Yes, there are NO INCOME limits on the Roth 401(k), which differs from the Roth IRA with it’s phase out.
It would be up to your company, but yes, you can split your contributions between the traditional 401(k) and the Roth 401(k).
The best thing to do is first find out whether or not your employer is going to offer the Roth 401(k). Then, if they do, you should sit down and figure what impact the Roth 401(k) will have on your taxes. This can be pretty easily done with Tax Cut software or Turbo Tax.
February 20th, 2006 at 9:30 am
Is the Roth 401k available to Individual “solo” 401k s? I.e. can a self employed business set one of these up for themselves?
November 14th, 2006 at 11:16 am
It’s almost a full year since Roth 401k became available. My company is finally enrolling in Roth 401k which will become available starting Jan 1st. I’d suggestion everyone check with their firms to see if anything’s changed.