Newspaper article The Christian Science Monitor

Employee Weighs Whether to Make the Switch to a Roth 401(k)

Newspaper article The Christian Science Monitor

Employee Weighs Whether to Make the Switch to a Roth 401(k)

Article excerpt

Q: My employer has given us the choice to switch from a traditional 401(k) retirement savings plan to a Roth 401(k) plan. Can you explain the benefits and negatives of this plan, including withdrawal rights? I.G., via e-mail

A: There are indeed a few differences between the Roth 401(k) and the traditional 401(k), says Bryant Evans, a financial planner in Champaign, Ill. Chief among them are income tax treatment of contributions, and the tax potential of withdrawals.

With the traditional 401(k) you get a tax deduction for the amount you elect to invest. For the Roth 401(k) you don't. It's that simple, more or less.

Let's say you earn $1,000 a week and invest $100 in your company's 401(k) plan. If it's through the traditional 401(k), the IRS taxes only $900 of your income. The $100 contribution is tax deferred. If you earmark that $100 into a Roth 401(k), however, you owe tax on the full $1,000.

But this tax bite reverses direction when you take money out of the 401(k), says Mr. Evans. For the traditional 401(k), all money withdrawn is considered taxable income (even earnings). When you make withdrawals from the Roth 401(k), though, the money is considered tax-free income.

Either way, you'll invest your dollars into the exact same stocks or mutual funds. So you'll be putting the same amount of money to work.

The question, then, is: Do you want a tax deduction now, with a 401(k), or the opportunity for tax-free income down the road with a Roth 401(k)?

Some experts we spoke with said a Roth 401(k) might make sense if you believe that you'll be in a higher tax bracket after you retire than during your working years. Paying off your house and otherwise losing itemized deductions could cause that to happen. Another expert said that a Roth might make sense if for no other reason than to diversify your approach to taxes. …

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