The Roth 401(k)
Some employers offer 401(k) plan participants the opportunity to make Roth 401(k) contributions. If you're lucky enough to work for an employer who offers this option, Roth contributions could play an important role in maximizing your retirement income.
What is a Roth401(k)?
A Roth 401(k) is simply a traditional 401(k) plan that accepts Roth 401(k) contributions. Roth 401(k)
contributions are made on an after-tax basis, just like Roth IRA contributions.This means there's
no up-front tax benefit, but if certain conditions are met, your Roth 401(k) contributions and all
accumulated investment earnings on those contributions are free from federal income
tax when distributed from theplan. (403(b) plans can also allowRoth contributions.)
Unlike Roth IRAs,where individualswho earn more than a certain dollar amount aren't allowed to contribute, you can make Roth contributions, regardless of your salary level, as soon as you're eligible to participate in the plan. And while a 401(k) plan can require employees to wait up to one year before they become eligible to contribute, many plans allow you to contribute beginning with your first paycheck.
There's an overall cap on your combined pretax and Roth 401(k) contributions. In 2012, you can
contribute up to $17,000 of your pay ($22,500 ifyou'reage 50 or older) to a 401(k) plan. You can
split your contribution any way you wish. For example, you can make $10,000 of Roth contributions
and $7,000 of pretax 401(k) contributions. It's up toyou.
But keep in mind that if you also contribute to another employer's 401(k),403(b), SIMPLE,or SAR-
SEP plan, your total contributions to all of these plans--both pretaxand Roth--can't exceed $17,000
in 2012 ($22,500 if you're age 50 or older). It's your responsibility to make sure you don't exceed
these limits if you contribute to plans of more than one employer.
ShouldI make pretax or Roth401(k)contributions?
When you make pretax 401(k) contributions, you don't pay current income taxes on those dollars (which means more take-home pay compared to an after-tax Roth contribution of the same amount). But your contributions and investment earnings are fully taxable when you receive a distribution from the plan. In contrast, Roth 401(k) contributions are subject to income taxes up front, but qualified distributions ofyour contributions and earnings are entirely free from federal income tax.
Which is the better option depends upon your personal situation. If you think you'll be in a similar or higher tax bracket when you retire, Roth 401(k) contributions maybe more appealing, since you'll effectively lock in today's lower tax rates. However, if you think you'll be in a lower tax bracketwhen you retire, pretax 401(k) contributions may be more appropriate. Your investment horizon and projected investment results are also important factors. A financial professional can help you determine which course is best for you.
Disclosure Information -- Important -- Please Review
Securities products and financial planning services are offered through registered representatives and financial planners, respectively, of New England Securities Corp. (NES), a broker-dealer (member FINRA/SIPC) and a Registered Investment Adviser, Boston, MA 02116. Baystate Financial Services is a separate entity of NES. L0309025216[exp0313][CT,MA,ME,NH,RI]