Employers are beginning to adapt a relatively new kind of retirement plan: a Roth 401(k). Unlike a normal 401(k) funded with pre-tax dollars, a Roth 401(k) uses after-tax contributions but provides tax-free distributions during retirement.
Although you can put a total of as much as $18,000 into a 401(k), in 2017, and an additional $6,000 if you’re over age 50, if your company offers both traditional and Roth versions, you’ll have to decide whether to contribute to one or both, and how much.
If you’re just starting out, the Roth 401(k) could be appealing. Investment earnings compound free of taxes, just as in a traditional plan, and it could be an advantage to pay taxes on the money now, when you may be in a lower tax bracket.
However, because you’re taxed on the salary deferral that funds a Roth 401(k), you’ll take home decidedly less than if you were putting the money into a traditional 401(k). And your higher reported income could put you above the ceiling for child tax credits and other current tax breaks.
Moreover, your employer may have different rules for matching your contributions to a Roth 401(k), and the investment opportunities may not be the same. If your company offers this new type of retirement plan, we can help you weigh your options and decide how to maximize your benefits.
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