Roth 401(k) plans take off |
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"For people who are in extremely low tax brackets, it's a
no-brainer," he says. "Unfortunately, they're going to have to forgo
a current tax deferral, but for them there is no risk. If your tax rate today
is zero, you'd be out of your mind to do anything but a Roth. You can have zero
now and zero later."
For those in between the mailroom
and the boardroom, Roman says the attraction of a Roth 401(k) may
be more in its estate planning benefits. Your pay now vs. pay later calculation
may work out differently if you factor in the tax bracket your heirs may be in
when they inherit your estate.
"You may retire and be
in a relatively low tax bracket, but if you die and that goes to your kids, oftentimes
they're in a much higher tax bracket and they get to pay all of the tax on it,"
he says. "It's always a shock to the kids that they have to pay tax at their
tax bracket."
The income mix you're likely to face in
retirement may also influence your need for Roth tax-free distributions.
"How
is this going to affect your Social Security income in the future? If you make
more than $45,000, then 85 percent of your Social
Security is taxable. If you have a Roth IRA, the money you take out is not
adding to your income, so that might get you into a lower tax bracket and make
less of your Social Security taxable," says Roman.
The
coming "Rothapalooza"
There is a most enticing one-time
opportunity on the horizon for baby boomer employees who have a triggering (or
distribution) option in their pension plan.
Beginning in 2010,
you'll be able to convert
a traditional IRA to a Roth IRA and spread the tax bill, half due in 2011,
the other half in 2012. Call it "Rothapalooza."
That's
a potentially golden opportunity for highly compensated individuals who, having
been ineligible for Roth IRAs due to the income cap, have accumulated considerable
-- and taxable -- cash reserves. If you are 59½, or if your pension plan
has a triggering event or distribution option, you'll be able to roll that money
into a traditional IRA and then convert it to a Roth.
Moving
forward, the new rules in effect eliminate the income barrier to Roth IRAs, though
they do add a small toll in fees to open a traditional IRA before converting to
the Roth version.
In Ted Roman's estimation, Roth 401(k)s
and Roth IRAs are important tools to help make your money go further in retirement.
"I
think the Roth IRA is the most incredible investment. You put your money in, it
grows tax-free, and when you take it out it's tax-free and any time along the
way you can take out the principal and not have to pay taxes on it. What could
possibly be better than that?
"The younger you are, the
better this looks."
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