To Roth or Not to Roth is the question

There are two options for planning your retirement finances.  You can either contribute to a traditional IRA or A Roth IRA.

On a traditional IRA, employees have the convenience of contributing through deductions made from their pay.  In this option, you make your contributions tax deferred until your retirement or until your withdrawal.  You can establish many IRA accounts up to one year before you reach the age of 70 ½.  There are annual rebates available for the contribution to such IRAs.

However in Roth IRA you forget your tax break now in anticipation of getting it at the time of retirement.  There is much sweeter version of Roth available under which you can combine the features of traditional 401(k) IRA with a Roth IRA, which is called Roth 401(k).

The employees can contribute to this Roth 401(k) through a deduction from the payroll.  And the contributions are after tax, so that the participants can enjoy the withdrawals free of taxes after the age 59 ½.

The Roth 401(k) follows many rules of a traditional IRA.  The maximum annual contribution permitted is $15,000.  However your employer may fix a limit lower than this.  The employer may be willing to provide a matching contribution to yours, however the contribution will go into a traditional IRA.  If you are 50 or older then you can additionally contribute $5000 making it a total contribution of $20,000.

You may continue maintaining a traditional IRA and direct all or a part of your new contributions to a Roth IRA.  And your contributions to such Roth IRA are irrevocable, meaning they cannot be transferred to any traditional IRA account.  Both the traditional and Roth IRAs require distributions after the age of 70 ½.

A Roth 401(k) IRA is a greater benefit at the time of retirement.  As per the present development, the funds can be rolled over directly without paying any tax to a Roth IRA.  This feature is not available presently for the traditional 401(k) account.

Refer to the following points before taking a final decision to call for a Roth 401(k)

  1. a. Future taxes are always difficult to predict.  If you anticipate a higher tax bracket for you at the time of retirement then you should go for Roth 401(k)
  2. b. At the time of retirement you are not going to claim deductions for dependents.  Also you are not going to claim deductions for mortgages.  So you may face a higher tax bracket.  In that situation Roth 401(k) can come to your advantage.
  3. c. Roth 401(k) offers the benefit of a rollover of your funds directly to a Roth IRA.  This Roth IRA will not require distributions after the age of 70 ½.  This will increase the probability of tax for the gold top of assets and you can bequeath assets in higher value to your heirs.
  4. d. It is not necessary to meet the income criteria while participating in Roth 401(k). Roth IRAs are limited to adjusted gross income of $110,000 to individual taxpayers and $160,000 to married couples.  If your income is about the threshold for a Roth IRA, then Roth 401(k) is an attractive option for you.
  5. e. If you invest for a longer time (say for more than five years) in Roth 401(k), then you are going to benefit from a tax free growth.

You need to weigh all options keeping in mind your long term goals.  If no-tax option for the withdrawals attracts you and your employer is also making you available Roth 401(k), then it is a very good addition to the retirement planning strategies.