Hello, Roth
By: Russell Wild; Source: AARP Bulletin Date Posted: 2005-11-10 08:44:00-05:00
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."
Additional Related Links
AARP.org's Guide to Financial Planning
Interactive Retirement Calculator From AARP Bulletin Online
The Do-It-Yourself Pension (AARP Bulletin Online)
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