investing

Know the Benefits of a Roth 401(k)

Determine whether it’s important for you to have tax-free money in retirement.

Question: My company is starting to offer a Roth 401(k). I’m 56 years old, and most of my savings is in a traditional 401(k). Does it make sense to contribute to the Roth? - G.K., St. Peters, Mo.

Answer: The key question is whether you think your income tax rate is lower now than it will be in retirement. That’s because with a Roth 401(k), you don’t get a tax deduction for your contribution up front, but you can withdraw the money tax-free in retirement.

“For a younger person who expects their earnings to go up later, that’s a clearer case for the Roth 401(k),” says Roger Young, a senior financial planner with T. Rowe Price.

It’s a tougher decision if you’re currently in a high tax bracket. Your tax rates could still be high in retirement if you have a lot of savings in tax-deferred accounts. (Tax rates are set to rise at the end of 2025.) Consider contributing at least some money to the Roth to provide tax diversification, allowing you to manage withdrawals from tax-free and tax-deferred accounts so you can limit the tax bite and avoid other levies on high-income retirees, such as the Medicare surcharge.

Most Popular

Dying Careers You May Want to Steer Clear Of
careers

Dying Careers You May Want to Steer Clear Of

It’s tough to change, but your job could depend on it. Be flexible in your career goals – and talk with your kids about their own aspirations, because…
September 13, 2021
7 Best Commodity Stocks to Play the Coming Boom
commodities

7 Best Commodity Stocks to Play the Coming Boom

These seven commodity stocks are poised to take advantage of a unique confluence of events. Just mind the volatility.
September 8, 2021
5 Top Dividend Aristocrats to Beef Up Your Portfolio
dividend stocks

5 Top Dividend Aristocrats to Beef Up Your Portfolio

The 65-member Dividend Aristocrats are among the market's best sources of reliable, predictable income. But these five stand out as truly elite.
September 14, 2021

Recommended

ETFs and Mutual Funds with Todd Rosenbluth
Index Funds

ETFs and Mutual Funds with Todd Rosenbluth

Which is better: ETFs or mutual funds? And how do you decide where to put your investments? CFRA fund expert Todd Rosenbluth has some answers. Also, h…
September 22, 2021
These 2 Emotional Biases Could Kill Your Retirement
Investor Psychology

These 2 Emotional Biases Could Kill Your Retirement

Are your emotions sabotaging your retirement plans? Some basic knowledge and careful introspection can go a long way toward avoiding major pitfalls.
September 20, 2021
Investment Strategies for the 4 Stages of the Economic Cycle
Markets

Investment Strategies for the 4 Stages of the Economic Cycle

The U.S. economy is cyclical in nature, surging ahead and pulling back in waves over time. Investors’ portfolios need to change with the rise and the …
September 19, 2021
Is a Target Date Fund Right for You?
investing

Is a Target Date Fund Right for You?

You're busy, and poring over investments is a pain. Wouldn't a target date fund be easier? Take a look at their pros and cons to see if incorporating …
September 14, 2021