There can be confusion when it comes to the Roth name before retirement planning vehicles. This is an attempt to explain the difference between two very common retirement plans with Roth options – the Roth IRA and the Roth 401(k). Let’s start with the “Roth” part. Named after the senator that first introduced the legislation, having Roth in front of IRA or 401(k) means that contributions into the plan are made with after-tax dollars (money that’s already be subject to income taxation). When the account owner reaches a specific age (typically age 59.5) any distributions, including earnings (growth) are tax free. Roth IRAs allow annual contributions based on earned income (W2 or self-employed income) up to $6,000 or $7,000 annually (if over age 50). Roth IRAs also allow access to your contributions at any time without penalty, and do not have required minimum distributions at age 72. Finally, you can […]
roth 401 k
Roth or Pre-Tax 401(k)?
As an employee of a company you may have access to a 401(k). A 401(k) is an employer-sponsored (offered) retirement plan that allows you to save money for retirement. Sometimes your employer may provide a match based on a percentage of your contributions. Your employer may give you the option of saving to a pre-tax account or a Roth account. A pre-tax contribution means that your contributions are made to your account before federal and state taxes are applied to your paycheck. A Roth contribution means that taxes are taken first, then the contribution goes to your account. This is also known as an after-tax contribution. If you make pre-tax contributions, you avoid tax now, but then are taxed when withdrawals are made in retirement. If you make Roth contributions now, you’re taxed today, but withdrawals in retirement are tax-free. It can make a lot of sense to contribute to […]
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Roth 401k – Is It Right for You?
Many employers are now offering a Roth 401k option in addition to the traditional 401k option. And with this new choice comes many questions: What is the benefit? Is a Roth 401k a good idea for me? How can I choose between the traditional 401k and the Roth? Benefits of Roth 401k Much like a Roth IRA, the Roth 401k can provide you with tax-free income when you retire. This benefit comes to you in exchange for no tax deduction when you contribute your funds to the Roth account. Contributing money to a traditional 401k account results in a reduction from your income for the year. Then when you withdraw money from the account in your retirement, you will have to pay tax on the money withdrawn. This is the primary difference between the traditional 401k and the Roth. Another benefit of the Roth 401k is that when you retire […]
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Asset Location
Diversification and asset allocation are important components to any investment plan. Additionally, where assets such as stocks and bonds are held, also called asset location, should also be considered. Asset location refers to the type of account that asset classes are held. Such accounts are generally traditional and Roth IRAs, employer-sponsored plans such as 401ks, etc., and after-tax, non-qualified investment accounts. The reason asset location becomes important is to help make use of tax efficiency in an investment portfolio. For example, stocks held in after-tax, non-qualified accounts for longer than one year as well as qualified dividends are taxed at much more favorable rates. These favorable rates can range from as little as zero to 20%. Bond interest, however, is taxed as ordinary income, leaving an investor being taxed at potentially higher amount. As many readers know, amounts contributed to qualified, pre-tax accounts such as deductible IRAs, 401ks, etc., are […]
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Mechanics of 401(k) Plans – Saving/Contributing
Many folks have a 401(k) plan or other similar Qualified Retirement Plan (QRP) available from their employer. These plans have many names, including 403(b), 457, and other plans, but for clarity’s sake we’ll refer to them all as 401(k) plans in this article. This sort of retirement savings plan can be very confusing if you’re unfamiliar, but it’s a relatively straightforward savings vehicle. This is the first in a series of articles about the mechanics of your 401(k) plan – Saving/Contributing. Saving/Contributing You are allowed to make contributions to the 401(k) plan, primarily in the form of pre-tax salary deferrals. You fill out a form (online most of the time these days) to designate a particular portion of your salary to be deferred into the 401(k) plan. Then, each payday you’ll see a deduction from your paycheck showing the 401(k) plan contribution. The deduction is before income tax withholding is […]
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Retirement Plan Contribution Limits for 2014
The IRS recently published the new contribution limits for various retirement plans for 2014. These limits are indexed to inflation, and as such sometimes they do not increase much year over year, and sometimes they don’t increase at all. This year we saw virtually no increases for most all contribution amounts, but as usual the income limits increased for most types of account. IRAs The annual contribution limit for IRAs (both traditional and Roth) remains at $5,500 for 2014. The “catch up” contribution amount, for folks age 50 or over, also remains at $1,000. The income limits for traditional (deductible) IRAs increased slightly from last year: for singles covered by a retirement plan, your Adjusted Gross Income (AGI) must be less than $60,000 for a full deduction; phased deduction is allowed up to an AGI of $70,000. This is an increase of $1,000 over the limits for last year. For […]
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State Income Tax and Retirement Income
On only a few rare occasions does it make sense to defer money to your 401(k) or other employer sponsored plan instead of a Roth IRA. Those occasions include when your gross income excludes you from contributing directly to a Roth IRA (you can still convert), you are currently at a very high tax rate or the case of when you live in a state where retirement income is excluded from state taxation. Here in Illinois, the current law exempts retirement income from being taxed at the state level. What this means, is that any contributions to a 401(k), 403(b), SEP, SIMPLE and 457 avoid state income taxation. Qualified distributions at retirement are only taxed at the federal level, and then only as income. If you contribute directly to a Roth IRA that money is after-tax money going in. After-tax in this case meaning it’s been already taxed at the […]
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New Opportunities to “Roth”
Recently one of the tenets of the Small Business Jobs Act of 2010 came into effect, providing you with additional opportunities to set aside funds in a Roth account – not a Roth IRA, but rather a “designated Roth account”, often referred to as a Roth 401(k) or Roth 403(b). Designated Roth accounts are also often referred to as DRACs – just to keep the acronym train rolling. The way the new law works is that, if you have a 401(k) or 403(b) (the traditional kind), you can roll over or convert some of your funds to a DRAC while the account is still active – as long as your plan is set up to allow in-plan distributions of this variety. The eligible rollover distribution (ERD) must be made: after September 27, 2010; from a non-designated Roth account in the same plan, meaning your traditional 401(k) or 403(b); because of […]
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