I was asked recently about the differences between traditional 401k plans and Roth 401k plans. I then realized I didn’t have a solid answer. Truth be told, I had to do a little research on the subject. I’m not going to bore you with this article. This one is going to be straight the point. Want an easy answer? Well, the Roth 401k is a great choice for almost everyone. Let’s get into the details before you make any hasty decisions!
What is a Roth 401k anyways?
This is easy. It’s just like a typical 401k, but with some minor differences. A Roth 401k acts in the same way in terms of your boss managing your plan. Also, just like a typical 401k, money is taken out of your paycheck and placed within the Roth 401k plan. Once in the Roth 401k, you control the investment choices.
But what about the differences?
This is where it gets a little tricky. The money that goes into a Roth 401k is post-tax $’s. It’s both a negative and a positive. It’s bad because your taxes are higher now. The good is that you will never have to pay taxes on your distributions during retirement.
Another key difference is that you won’t have to pay taxes when you withdraw money after you’re 59 1/2. Yes, you read that right. You pay zero taxes when you withdraw during retirement! Sounds good to me. There’s one big BUT though. Unfortunately, you cannot withdraw your Roth 401k contributions. I mean you can, but you’d be facing stiff tax penalties.
Now, for the DEBATE! Taxes, taxes, taxes. This debate comes down to the pre-payment of taxes. With a Roth 401k, you pre-pay taxes now so you avoid paying taxes later. With a 401k, you avoid taxes now and pay taxes later. The goal is to lessen your tax burden of your retirement accounts. We could go on and on about the tax benefits and downfalls of a Roth 401k. I’ll let the Finance Buff explain the tax side of the debate, as he is much more knowledgeable on this subject. He presents a great case to NOT contribute to a Roth 401k, but I disagree with his view of future taxes. With the way taxes are going up now, crippled economy, and the fall of the dollar, I foresee extremely high taxes 30+ years from now.
So, how much can you contribute to you sweet Roth 401k? This is the best part. Unlike a traditional Roth-Ira, you can contribute a maximum of $16,500. But what if I make over $100k you ask. Man, I wish I made that much haha. Well the good news for you rich folks is that there are no income limitations for a Roth 401k. You could be a multi-millionaire and still contribute. But then again, you probably don’t need to worry about retirement accounts anyways…
Another key benefit is the rollover option. Let me give you an example. Say, a dude named Joe is working away at corporation ABC and he is actively contributing to his employer’s Roth 401k plan. On Monday, he finds a pink slip at his desk and now he’s fired. What happens to his Roth 401k contributions?! The good news is that Joe can rollover his contributions to an individual Roth-Ira and maintain tax-free growth. This is king in an economy where you never know if your job is secure.
Hmm, as for taxes, do you remember President Obama spending trillions of dollars out of thin air? There WILL be repercussions for the out of control spending. Guess who will be paying for it? You and me, that’s who. So protect your assets and retirement future by contributing to a Roth 401k today. Remember to keep a well diversified portfolio and invest for the long-haul. Get to it!