Does your employer offer a ROTH 401(k)? Is it really beneficial to contribute to a ROTH 4019(k)? The basic answer to that last question is yes provided you are young enough and do not plan on taking any withdrawals for at least 10 years. Like a ROTH IRA the money will go into the account taxed so any gains will be withdrawn tax free when you retire after age 59 ½. But unlike a ROTH IRA there are no income limitations on a ROTH 401(k) and no need to convert a Traditional IRA into a ROTH IRA. Under the current tax code employees under age 50 are allowed to contribute up to $17,500 annually. For those over the age of 50 the IRS allows you to contribute an extra $5,500 annually. And provided you retire after the age of 59 ½ and have had the ROTH 401(k) account for a minimum of five years the withdrawals will be tax free.
This makes sense on several different related reason. One when you are younger your earnings are generally less so you do not notice the tax consequences as much as someone who is in the prime of their earning career. By plugging some numbers into Excel you can see that the growth as a true tax free investment and not simply a tax deferred investment can lead to some serious differences depending on how long you are able to let the money compound tax free. But if you do not think your tax bracket will be as high as it is now while you are working the ROTH may not make the most sense for you.
But in retirement you will need to consider several variables that could influence your tax bracket. Social Security may be taxable depending on your family’s situation. Pensions could be a taxable source of income as well. Interest and dividends will be considered a source of income for you as well. And if you make a withdrawal from a Traditional IRA or 401(k) account that is considered ordinary income and will be taxed as well. If you have any further questions on what may or may not be taxed in your retirement years consult a financial advisor or tax professional.
If you do not wish to make the mandatory 401(k) withdrawals you have the option of converting the ROTH 401(k) into a ROTH IRA tax free. Now the remaining question that is an option for some employees is should they convert their Traditional 401(k) into a ROTH 401(k). Like converting an IRA you will be required to pay the taxes on the converted amount in the year the conversion is made. Unlike converting an IRA you will not be able to change your mind on a 401(k) conversion.
Check with your employer to see what options are available to you where you are working. Consult a professional to get an idea of what your retirement may look like. However, keep in mind no one knows what the future will hold for investments or taxes but you need to be able to make the most informed decision that you can make based on today’s facts. ROTH accounts are a great source of possible wealth accumulation for anyone but especially those who are younger or will be able to let the money accumulate tax free over a longer period of time.
