Should I be Using my Roth 401k?


You could be saving more money tax-free.

If your company offers a Roth 401k option, this could be your ticket. Many people question if they should be taking advantage of a Roth 401k?

To help you make a decision, we’ve answered questions we hear most when people consider the benefits of using a Roth 401k.

What will my tax picture look like in retirement?

If you think your tax rate in retirement will be higher than it is now, then making contributions to your Roth 401k could make sense.  As you grow older, you will likely pay down your mortgage and have children move out, leaving you with lower itemized deductions, and higher taxable income.  Similarly, if you plan to have an increased spending pattern in your golden years, then higher taxes will most likely be a reality you will be facing.  Some would argue that given our current state in the tax history of this country, we’re very likely to see taxes increase at some point down the line as well.

Will my paycheck be lower?

Choosing the Roth 401k will result in a lower paycheck than when you were making traditional 401k contributions.  This is because your contributions are taxed before they are deposited in the account.  This is in direct contrast to your previous traditional 401k.  Those contributions were deposited before they were taxed.  Therefore, less comes out of your paycheck with traditional 401k contributions.

I’m not sure I have enough time before retirement?

The time before retirement could make or break your decision.  If you have a 30 year time span in which to invest, the tax-free growth plus lower tax brackets are hard to beat.  But if you’re in your late 50’s, with retirement no more than 5 years away, the tax-free growth may not be enough to make the switch.

What if I make too much money?

There are no income restraints to participate in the Roth 401k.  In order to contribute to Roth IRA’s your income needs to be south of $194k to make the full $5,500 ($6,500 if you’re 50 or over in 2016) per year contribution.  By using the Roth 401k, you will be able to deposit $18,000 ($24,000 if you’re over 50) into a tax-free account.

Does my match grow tax-free as well?

Even if you decide to fund the Roth 401k, your employer’s match (assuming you receive one) will be funneled to the traditional 401k in pre-tax deposits like it normally would.

Also, as of this year, you are now able to convert a portion of your current 401k to a Roth 401k.  Keep in mind, that each situation is different and you can only truly know if a Roth 401k is right for you by evaluating your own personal situation.

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