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On Jan. 1, 2006, there will be a new kid on the retirement block—the
Roth 401(k). If your company offers one and you sign up, you will be
contributing "after tax" money to your account—you won't
get a tax deduction upfront, as you do with your existing 401(k).
So why do it?
There are two main reasons, says Jeffrey Bogue, a certified financial
planner in Wells, Maine. First, you aren't going to have to pay income tax
when you withdraw the money in retirement, as you will with your existing
401(k). Second, you won't have to worry about taking minimum required
distributions starting at age 701/2, as you do now with a 401(k). You can keep
the money in the Roth as long as you wish or leave it as a tax-free inheritance
to your heirs.
"I'd say the Roth 401(k) will prove to be the better long-term
option for most older working people," says Bogue. On the other hand, if
you are currently in a high tax bracket and expect to be in a lower tax bracket
in the future, the Roth might not make sense, says Bogue. "If you are
single and make over $75,000 a year, or if you and your spouse together make
over $100,000, I'd suggest talking to a financial adviser to find out which
plan is best."
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