YOUR RETIREMENT
PLAN, SAVE & MAKE YOUR MONEY LAST
PRINT
EMAIL
DEL.ICIO.US
DIGG THIS
You may have to wait a little longer to open a Roth 401(k), but the wait could be worthwhile. That's because employees with access to the new plan will have a new and attractive way to accumulate money that won't be taxed in retirement.
With a traditional 401(k), you squirrel away pretax dollars, boosting your nest egg while lowering your current tax bill. The tax bite comes later, when you start to withdraw money in retirement. Those distributions, which must begin by age 70½, are taxed at your regular income-tax rate, not the lower capital-gains rate reserved for other investments. Your heirs are also taxed on inherited accounts.
Now comes the new Roth 401(k), a retirement-savings plan that employers may start offering in January. Contributions are not tax-deductible. But if the account has been open for at least five years, all withdrawals after age 59½ are tax-free -- both yours and those of your heirs.
Who benefits. Younger, lower-paid workers have the most to gain from a Roth 401(k). Because they're in a low tax bracket, they reap limited rewards from current tax deductions. Plus, earnings on their contributions will grow tax-free for decades.
Highly paid workers, who are closed out of the more familiar Roth IRA because of income restrictions, also stand to gain. You cannot contribute to a Roth IRA once your income exceeds $110,000 if you are single or $160,000 if you're married. But a Roth 401(k) has no income restrictions (although, depending on the plan, highly compensated workers who earn more than $100,000 may not be eligible to contribute the full amount). In addition, you won't have to take mandatory distributions as long as you roll over your savings into a Roth IRA when you retire.
Although the prospect of tax-free withdrawals is tempting, the loss of a current tax deduction could be significant. To estimate the impact of a Roth 401(k) contribution on your take-home pay when subject to federal and state taxes as well as social security, try the free Roth 401(k) analyzer at www.401khelpcenter.com. It will also estimate the after-tax value of a traditional 401(k) at age 65 compared with the tax-free balance in a Roth 401(k). (Note that the illustrations are hypothetical because future tax rates can't be predicted.)
One option is to split your contribution between a traditional 401(k) and a Roth account. That way you benefit from current tax savings and future tax-free withdrawals. In 2006, you can contribute up to a total of $15,000 to 401(k) plans, plus an additional $5,000 in catch-up contributions if you are 50 or older.
One fly in the ointment is that the Roth 401(k) will not be widely available right away. A study by the Profit Sharing/401(k) Council of America found that 17% of employers plan to offer Roth 401(k)s, but fewer than half expect to have plans available on January 1. A delay by the IRS in issuing final regulations is partially to blame.
Reprint Article
|
|
|
|
|
