Numerous traders have a new retirement savings option: the Roth 401(k). Plus it could possibly be a big advantage to all those individuals who are getting close to retirement and wish to save much more and enjoy tax breaks.
To begin with, the Roth 401(k) is not for everybody. If you are in retirement, it isn't available to you, because as with the standard 401(k), the Roth 401(k) is offered by employers. However for individuals who are nonetheless working, the Roth 401(k) may be a practical investment choice.
Just as it sounds, the Roth 401(k) brings together features of the Roth Individual Retirement Arrangement (IRA) and also the traditional 401(k). Just like a Roth IRA, you get a number of tax breaks:
• contributions to a Roth 401(k) are made on an after-tax basis (i.e. no tax break at time of contribution);
• the account grows tax-free;
• withdrawals aren't subject to income tax (provided you've held the account for five years or more, and also the distribution is made after you attain age 59½, in the event you end up being disabled, or in the event you pass away).
However just like a 401(k), you may contribute to a Roth 401(k) regardless of your income, and its contribution limitations are the same as the traditional 401(k), which in 2012 is $17,000-or $22,500 for those fifty or older.
What which means: If you are attempting to stash as much as possible into your retirement accounts, the Roth 401(k) might possibly become a good opportunity for tax breaks, according to your other economic circumstances.
Before you decide to contact your employer, although, you might want to concentrate on 2 issues. First, the contribution restriction applies to contributions to both types of 401(k) programs, so that you can solely save a total of $17,000 in your traditional 401(k) and Roth 401(k) combined. Nevertheless, you can use both plans, contributing, for instance, $8500 to each. Furthermore, your employer may not yet provide the Roth 401k so as to enjoy the tax breaks explained.
Who may select the Roth 401(k) over the traditional 401(k)? That's a individual choice which you should discuss with somebody accustomed with your individual economic conditions and goals, like your financial or tax expert. But in general, in the event you expect your income tax rates to be the same or higher in retirement than it's now, you need to choose a Roth 401(k). Or, in the event you think your tax bracket will be reduced in retirement than it's now, you might select a conventional 401(k).
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