Numerous investors have a new retirement savings choice: the Roth 401(k). Plus it might potentially be considered a large advantage to all those people who're getting close to retirement and wish to conserve much more and take advantage of tax savings.
To begin with, the Roth 401(k) is not for everyone. If you're in retirement, it is not accessible to you, because as with the traditional 401(k), the Roth 401(k) is provided by employers. However for individuals who're still working, the Roth 401(k) may be considered a practical investment option.
Just like it sounds, the Roth 401(k) brings together functions of the Roth Individual Retirement Arrangement (IRA) and also the conventional 401(k). As with a Roth IRA, you get numerous tax savings:
• contributions to a Roth 401(k) are made on an after-tax basis (i.e. no tax savings at time of contribution);
• the account develops tax-free;
• withdrawals aren't subject to income tax (provided you have held the account for 5 years or even more, and also the syndication is made once you reach age 59½, if you become handicapped, or if you pass away).
But as with a 401(k), you might contribute to a Roth 401(k) regardless of your income, and its contribution limitations are the same as the conventional 401(k), which in 2012 is $17,000-or $22,500 for all those 50 or older.
What which means: If you're attempting to stash as much as possible into your retirement accounts, the Roth 401(k) could potentially be a great opportunity for tax savings, based on your other economic circumstances.
Before you decide to contact your employer, although, you might want to be aware of two things. First, the contribution limit applies to contributions to both types of 401(k) plans, so you can only save a total of $17,000 in your conventional 401(k) and Roth 401(k) put together. Nevertheless, you may utilize both plans, contributing, for instance, $8500 to each. Additionally, your employer might not yet provide the Roth 401k so that you can enjoy the tax savings explained.
Who might select the Roth 401(k) over the traditional 401(k)? That's a personal choice which you need to discuss with somebody familiar with your individual financial circumstances and goals, like your economic or tax consultant. However in general, if you expect your income tax rates to be exactly the same or higher in retirement than it's now, you need to choose a Roth 401(k). Or, in the event you believe your tax bracket will be lower in retirement than it's now, you might select a traditional 401(k).
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