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My Wife’s Company Will Begin Offering the Roth 401(k) Next Year
By JLP | July 17, 2007
I found out yesterday that my wife’s company will begin offering the Roth 401(k) in January, 2008. Immediately I started thinking about whether or not it is a good deal for us. Believe it or not, it’s not a simple decision because there are numerous variables to consider.
NOTE: It’s important to keep in mind that I am NOT a tax expert. So, if some of my thought processes don’t make sense here, that’s why.
So, here are some PROS and CONS (if I missed any, please let me know by leaving a comment) of the Roth 401(k):
PROS to the Roth 401(k):
1. Roth 401(k) offers the ability for tax-free income at retirement.
2. Roth 401(k) can be rolled into a Roth IRA. For those who make a lot of money, this could be an easy way to move money into a Roth IRA.
3. As of right now, income received from a Roth IRA during retirement does not count when figuring the taxation of Social Security benefits.
4. Unlike other accounts during retirement, there are no required minimum distributions with a Roth IRA.
5. Tax rates could be higher in the future, which would make tax-free income in the future, more valuable.
CONS to the Roth 401(k):
1. A Roth 401(k) is funded with after-tax money, which means higher tax bills now and could possibly subject you to the dreaded Alternative Minimum Tax. I did a quick calculation and figured that our tax bill for 2006 would have been around $2,000 higher had we gone with the Roth 401(k).
2. Along the lines with number 1, Roth 401(k) contributions will mean higher taxable income now. This could affect deductions.
3. There’s really no guarantee that lawmakers won’t change their minds and begin taxing Roth IRAs at some point in the future.
4. The employer match is put into a separate account, which will then be fully taxable at retirement. This is a wash since you don’t pay taxes or get a tax benefit from an employer match.
Those are the pros and cons that I can think of. I’m sure there are lots more that I just haven’t thought of. If I missed some, let me know and I’ll add them to the list.
For me, the jury is still out on whether this is a good deal for our family. I’m thinking about going half and half and trying it out.
Topics: 401(k), Investing, Retirement Planning, Roth 401(k), Roth IRA |