Roth 401(k): a new way to grow money
tax-free -- Page 2
That rollover feature seems to offer an easy way around the distribution
requirements if you're planning to leave the account to an heir
or if you simply don't want to withdraw money from the Roth by age
But, for most people, the main
reason to contribute to a Roth is to let the money grow tax-free.
No one knows what the tax rates will be in the future, so it seems
wise to hedge the taxable contributions and earnings in a 401(k)
with earnings in a Roth that can be withdrawn tax-free. This is
especially true if you're young and in a low tax bracket but have
every reason to believe your income will be increasing, putting
you in a higher tax bracket.
Tom Grzymala, a certified financial planner with Forensic
Analytics in Keswick, Va., advises contributing to the regular 401(k)
up to the amount that's being matched by the employer or you'll
be leaving money on the table. After that, put your money into the
"Would you rather enjoy a $1,680 tax break today
on your $6,000 401(k) contribution while you're in
the 28-percent tax bracket, and then pay taxes on the $6,000 plus
all the dividends and appreciation that might accrue over the next
X years? Or, would you rather pay the $1,680 in taxes today, and,
X years from now, take out the whole enchilada for free? It doesn't
seem hard to figure that one, especially if you're a 30-something!"
As Grzymala notes, the benefit of tax-free savings
is a no-brainer for younger workers who have 20, 30 or 40 years
before retirement, but people who are close to retirement should
carefully weigh the options.
Geordie Crossan, CFP, and president of NBS Financial
Services in Westlake Village, Calif., advises employees to look
at all of the sources they'll be using for money at retirement.
"Is it in qualified retirement plans or is it
outside of qualified plans -- stock options, brokerage accounts?
If their assets aren't in (tax-deferred) qualified retirement plans,
then any ability to save in a tax-free vehicle vs. money coming
out fully taxable gives options for planning distributions."
A survey by Hewitt Associates indicates that approximately
33 percent of 401(k)-plan sponsors are likely or somewhat
likely to offer the Roth 401(k).
Lori Lucas, director of participant research at Hewitt,
says it may take a show of interest by employees to get companies
to add the Roth 401(k) option to their plans.
"We did the survey late last year, quite a ways
off from when the Roth 401(k) would be available. There's
some ambivalence on the part of plan sponsors. They're weighing
trade-offs. The Roth 401(k) adds flexibility to the
typical 401(k) plan, but it could add a dimension of
confusion. People will need more education and more tools to understand
the difference (between the regular 401(k) and the
Another reason some companies may be skittish about
adding the Roth 401(k) is because it comes under a
tax act that expires at the end of 2010. Unless Congress extends
the act, participants will not be able to contribute additional
money to the Roth after that time, although money already in the
account would continue to grow tax-free.
But, as Crossan points out, from a saver's standpoint,
if it makes sense to do something, then it makes sense to do it
even if it's just for four years.
If you're interested in contributing to a Roth 401(k)
plan, it may be in your best interest to talk to your employer about
it. Don't assume the company will automatically make the arrangements.