Small Business Resource: Is Your Crystal Ball Showing A Roth 401(k)?

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November 30, 2006

Is Your Crystal Ball Showing A Roth 401(k)?

by Joshua Geary

When does it make sense to turn your company 401(k) plan into a ROTH 401(k) plan so that you could start earning tax free savings through monies invested in the 401(k)?

A ROTH 401(k) makes sense if you want to save more for retirement. Since you’ve already paid the tax ahead of time, the money you withdraw from your ROTH (401)K is all yours, tax free, when the time’s ripe for you to withdraw it.

It also makes sense if you think you’re going to be in a higher tax bracket when you retire. If taxes go up between the regular contributions you make and the time you withdraw them, you shall have paid taxes already when the rates were low, hence protecting you from taxes on the upswing.

Finally, a ROTH 401(k) makes sense if you desire a greater degree of flexibility at retirement. Since we can’t predict what taxes will be like in the years to come, we might as well have control over how much tax we want to pay each year when we start making withdrawals. Maintaining a combination of tax-deferred accounts like the usual 401(k) and traditional IRAs, tax free accounts like the ROTH 401(K) and ROTH IRA, would put us at an advantage when we start using that money for our retirement needs.

For more information on Roth options with your 401K click the link.

Posted by David at November 30, 2006 3:59 PM