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With more and more people concentrating on retirement investing, many likely have noticed more employers offering Roth 410(k)s. But what are they exactly, and are they right for everyone?
"If the plan participant in the 401(k) is younger and in their lower income earning years, they should consider the Roth 401(k) option," said Dave Geibel, senior vice president and wealth advisor at Girard Partners in King of Prussia, Penn. "They are in a much lower tax bracket, and they're giving up an immediate tax savings today, for greater tax savings at a later date."
Geibel said for higher income wage earners, it's hard to justify giving up the tax deferral on a traditional 401(k), but if you are just starting your career and in a lower tax bracket — and know you will be earnings more in the future — the tax hit is just not that great today. He added a Roth IRA would be a great option in addition to a 401(k) — since money put in the Roth IRA is after tax, and money grows tax free for life.
"If you are working and you don't have an employee sponsored retirement plan, a Roth IRA is a great option," Geibel said. "If you're working and have a 401(k) and there's extra money a Roth IRA is also a great option."
Rob Jupille, president of RTJ Financial Management in Santa Monica, Calif., said his firm is increasingly offering clients the Roth 401(k) option, which were introduced in 2006.
"It's a great way to meet the needs of a diverse age group workforce," Jupille said.
"The differences between a traditional 401(k) and Roth 401(k) are the same as those between a traditional IRA and Roth IRA," he said. "In each case, the traditional product provides an up-front tax deduction for your contribution which is then taxed when you distribute it in retirement. On both Roth products, there is no upfront deduction, but the qualified distributions are not taxed."
Jupille also said he recommends the Roth for workers who are generally younger and who anticipate that they will be in a higher tax bracket in retirement than they are currently in — as well as to workers who have accumulated a large sum in the traditional 401(k) to consider contributing to the Roth 401(k) so that they have a tax-efficient retirement income.
"The traditional 401(k) is most appropriate for current high income employees that anticipate they'll be in a lower tax bracket in retirement as the value of the immediate deduction is more valuable than the tax-free distribution," he added.
Having tax free distributions from a Roth 401(k) or Roth IRA account in retirement is a huge benefit, said Stephen Rischall, co-founder of 1080 Financial Group in Los Angeles.
"Upon reaching age 59 and a half, you may pull funds from retirement accounts," Rischall said. "When you withdraw funds from a Roth account, then you do not pay any taxes at all on the distribution. When you withdraw funds from a traditional account then you pay income taxes on the full amount distributed."
Rischall, however, also adds to remember there are no income limits when debating between a Roth 401(k) and its more traditional counterpart — unlike a Roth IRA where there are income limits which may exclude someone from making direct contributions to a Roth IRA or prevent them from being able to deduct contributions to a traditional IRA. In 2016, the maximum you may contribute to an IRA account is $5,500 and if the person was more than 50 years of age that increases to $6,500.
"With 401(k) accounts, there are no income limits, therefore, anyone can contribute to a Roth 401(k) or traditional 401(k) regardless of earning too much to make IRA contributions," he said. "In 2016 the maximum an employee may contribute to a 401(k) account is $18,000 and if (over age 50) that increases to $24,000"