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Young, married top earners may like Roth 401(k)Young, married top earners may like Roth 401(k) By SCOTT BURNS Universal Press Syndicate Q: My company will soon start offering a Roth 401(k) option. Can you advise when one should choose it over a regular 401(k) option? Do company matching contributions also go into the Roth 401(k) or do they go into a regular 401(k) when the participant goes into the Roth 401(k)? ADVERTISEMENT Can you provide hypothetical examples that clearly show when each option is appropriate for an investor? â?? K.D., by e-mail from Irving A: The Roth 401(k) option will be available Jan. 1, 2006, from those companies that choose to add it to their benefits. At the moment, it isn't clear how many will be adding Roth 401(k) plans because they will raise questions that most human resources departments don't have the tools to answer. Here is what we know for certain: â?¢A Roth 401(k) plan will have the same contribution limits as a traditional 401(k) plan, $16,000 a year for those under 50, up to $20,000 when the 50 and over "catch-up" provision is added. â?¢The difference between plans is that Roth 401(k) contributions will be after-tax contributions. In effect, employees will be able to stash more money in a Roth 401(k) than a traditional 401(k) because they'll have already paid taxes on their Roth 401(k) contributions. â?¢A Roth 401(k) plan won't have the income limitation of a Roth IRA. Many high-income workers and dual-income couples who can't contribute to a Roth IRA will be able to participate in Roth 401(k) plans. â?¢Your employer's contribution, by law, will continue to go into the traditional 401(k) plan. How much anyone will benefit from the new plans depends on future tax rates, individual earnings and whether you are married or single. A company that employs a large proportion of relatively low-wage but older workers who happen to be single, for instance, might not be providing much of a benefit because its work force will be in a low tax bracket while working and in retirement. But a company that employs a large proportion of relatively high-income younger workers who are part of dual-income households would be helping its work force with a tool that may reduce future taxation in general and the taxation of Social Security benefits in particular. Q: My wife and I are 39, so we converted our IRAs to Roth IRAs about six years ago, hoping that when we take out the earnings we'll be in a higher tax bracket so it would make sense. So we're paying taxes on the money we put in the account with the understanding that the withdrawals will not be taxed. Now I'm no black-helicopter-type of guy, but what's to keep Uncle Sam from changing the rules on us and taxing our withdrawals in the future? I know there is always the ballot box to use to try and avoid such things, but I get a terrible feeling that my wife and I are the exception â?? saving for our own retirement â?? and others will gladly vote for a rule change. After all, we won't be "paying taxes." â?? K.C., by e-mail from San Antonio A: I think there are a few things about our friends in Washington that you don't understand. They would be too liable to be voted out of office, regardless of party, for such a direct assault on your Roth account nest egg. What all of us have to watch out for is much more subtle â?? new and improved forms of weasel wording that raises taxes without seeming to raise taxes. Both parties do this â?? witness the dreaded Alternative Minimum Tax and its equivalent for retirees, the taxation of Social Security benefits. Then think about disappearing itemized deductions and the disappearing standard exemption. Future tax increases are much more likely to be found in a tax "reform" that, say, adds a new tax bracket between 15 and 25 percent or discovers a patriotic need to tax gasoline and home heating fuels, etc. Meanwhile, the best we can do is prepare for tax changes by building flexibility. We can do that by having a diversified portfolio of account types as well as a diversified portfolio of assets. Questions about personal finance may be sent to: SCOTT BURNS, P.O. Box 655237, Dallas, TX 75265; e-mail can be sent to scott@scottburns.com. Burns' Web page is www.scottburns.com. By SCOTT BURNS Universal Press Syndicate Q: My company will soon start offering a Roth 401(k) option. Can you advise when one should choose it over a regular 401(k) option? Do company matching contributions also go into the Roth 401(k) or do they go into a regular 401(k) when the participant goes into the Roth 401(k)? Can you provide hypothetical examples that clearly show when each option is appropriate for an investor? â?? K.D., by e-mail from Irving A: The Roth 401(k) option will be available Jan. 1, 2006, from those companies that choose to add it to their benefits. At the moment, it isn't clear how many will be adding Roth 401(k) plans because they will raise questions that most human resources departments don't have the tools to answer. Here is what we know for certain: â?¢A Roth 401(k) plan will have the same contribution limits as a traditional 401(k) plan, $16,000 a year for those under 50, up to $20,000 when the 50 and over "catch-up" provision is added. â?¢The difference between plans is that Roth 401(k) contributions will be after-tax contributions. In effect, employees will be able to stash more money in a Roth 401(k) than a traditional 401(k) because they'll have already paid taxes on their Roth 401(k) contributions. â?¢A Roth 401(k) plan won't have the income limitation of a Roth IRA. Many high-income workers and dual-income couples who can't contribute to a Roth IRA will be able to participate in Roth 401(k) plans. â?¢Your employer's contribution, by law, will continue to go into the traditional 401(k) plan. How much anyone will benefit from the new plans depends on future tax rates, individual earnings and whether you are married or single. A company that employs a large proportion of relatively low-wage but older workers who happen to be single, for instance, might not be providing much of a benefit because its work force will be in a low tax bracket while working and in retirement. But a company that employs a large proportion of relatively high-income younger workers who are part of dual-income households would be helping its work force with a tool that may reduce future taxation in general and the taxation of Social Security benefits in particular. Q: My wife and I are 39, so we converted our IRAs to Roth IRAs about six years ago, hoping that when we take out the earnings we'll be in a higher tax bracket so it would make sense. So we're paying taxes on the money we put in the account with the understanding that the withdrawals will not be taxed. Now I'm no black-helicopter-type of guy, but what's to keep Uncle Sam from changing the rules on us and taxing our withdrawals in the future? I know there is always the ballot box to use to try and avoid such things, but I get a terrible feeling that my wife and I are the exception â?? saving for our own retirement â?? and others will gladly vote for a rule change. After all, we won't be "paying taxes." â?? K.C., by e-mail from San Antonio A: I think there are a few things about our friends in Washington that you don't understand. They would be too liable to be voted out of office, regardless of party, for such a direct assault on your Roth account nest egg. What all of us have to watch out for is much more subtle â?? new and improved forms of weasel wording that raises taxes without seeming to raise taxes. Both parties do this â?? witness the dreaded Alternative Minimum Tax and its equivalent for retirees, the taxation of Social Security benefits. Then think about disappearing itemized deductions and the disappearing standard exemption. Future tax increases are much more likely to be found in a tax "reform" that, say, adds a new tax bracket between 15 and 25 percent or discovers a patriotic need to tax gasoline and home heating fuels, etc. Meanwhile, the best we can do is prepare for tax changes by building flexibility. We can do that by having a diversified portfolio of account types as well as a diversified portfolio of assets. Questions about personal finance may be sent to: SCOTT BURNS, P.O. Box 655237, Dallas, TX 75265; e-mail can be sent to scott@scottburns.com. Burns' Web page is www.scottburns.com. Homepage Other open community sites http://www.business-business.biz Please support are sponsors. To design you custom retirement plan. http://www.retirement-plan.us For planning a IRA rollovers. http://www.ira-rollover.us Professional asset allocation and the wonders it can do. http://www.asset-allocation.us Professional money management: National ranked performance. For cash accounts http://www.durig.com For retirement accounts http://www.roth-ira.us Managers selected to fit your needs. http://www.money-managers.us |
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