Wash. D.C. msn.com
If you are looking forward to a retirement spent paying hefty tax bills, a trend called the Roth 401 K has developed to help buy your ticket to happiness.k Once you turn age 70 and a half, you are forced to start taking money out of your retirement plan, the terminology is “required minimum distributions” and every penny you take is taxable income.
Vanguard reports that nearly two thirds of 401 k plans it administers now have the option of saving in a Roth 401 k, rather than the standard traditional 401 k. With a Roth, contributions are made with after tax income. The payoff comes in retirement when you can either skip RMD’s completely or take distributions without owing a penny in tax.Yet less than 15 percent of retirement savers with the ability to save in a Roth 401 k are taking advantage of the Roth option. “I’m from the Midwest, so I use a farm analogy: Do you want to pay tax on the seed or on the harvest,” said David Hays, president of Comprehensive Financial Consultants in Bloomington, Indiana. “The only rational answer is that you pay it on the seed.” That is, take your tax hit early, by using a Roth 401 k is funded with after tax dollars, paying tax on the seed contribution–with the eventual payoff that you will not owe a penny of tax when it’s time to harvest your savings, in retirement.
While Roth 401 k plans are positioned as ideal for millennials who have yet to hit their peak earnings, 40 and 50 somethings who’ve been using a traditional 401 k for a few decades can add valuable tax diversification by switching over and doing some Roth saving. “Taxes are the most expensive thing in retirement,” said Hays. “Think about it, you pay 30 percent or so every time you want to access your money.” For the record, anyone can contribute to a Roth 401 k. There are no limits. Employer matching contributions will continue to be made into a traditonal 401 k account.