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1/17/2017 |
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Choosing Between A Traditional And A Roth 401(k) |
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Choosing Between A Traditional And A Roth 401(k) by Victor Holloway, MBA Wouldn’t retirement planning be ever so much easier if each of us could see ahead into our individual futures? That’s a loaded question! Of course it would be. And if that were the case, I, for one, would also be out of a job. However, that is not the reality that we live in. Therefore, we need to be a bit more analytical, especially when making a decision between a traditional and Roth 401(k). It is necessary to examine if the 401(k) vehicle that you choose is going to build wealth for you and your family or if it will simply line the pockets of the Internal Revenue Service. Betting on the Future As we begin this conversation, I would like to educate you on the realities of both vehicles. Let’s first consider the details surrounding contributions to a traditional 401(k): - Pre-tax contributions are deductible from taxable income.
- The 401(k) grows on a tax-deferred basis.
- The 401(k) is subject to required minimum distributions when the participant reaches the age of 70.5 years.
- Withdrawals on both contributions and earnings are fully taxable.
- A traditional 401(k) must be rolled over first to a traditional IRA, and then it may be converted to a Roth IRA. This process requires a tax payment.
Now, let’s do the same for a Roth 401(k): - Contributions are subject to federal and state income taxes during the taxable year.
- There is no age requirement for receiving minimum distributions.
- Withdrawals of accumulated contributions and earnings aren’t subject to income taxes at retirement.
- Funds can be rolled over directly to a Roth IRA with no tax payment, a feature that is not available with a traditional 401(k) account.
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