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New Roth 401 (k): A Roth IRA on steroids
By admin | February 4, 2010
What started in January 1, 2006, the new Roth 401 (k) plan is available. It will be an exciting development because it will be millions of Americans to admit that not only the tax free savings and investments, while you work, but the income-tax free in retirement.
Of course, we already have Roth IRA, which gives us the tax advantages. But think of the Roth 401 (k), like the Roth IRA on steroids. The new plan has the same call from a regular Roth IRA – tax-free investment and pensionsincome – but with a much higher annual contribution maximum and no income ceiling.
Nobody will be able to contribute up to $ 15,000 per year, plus an additional $ 5,000 for persons over 49 years. It 'much more than a Roth IRA contribution. For 2006, the Roth IRA contribution limit of $ 4000 for people aged under 50, and $ 5,000 for the 50 and older. And while all the advantages of a Roth IRA are limited to those who have an income not exceeding to 95,000 $ perSingle and 150,000 $ for those who are married, Roth 401 (k) has no income ceiling for all.
With the Roth 401 (k), we get the pre-tax deductions that you get with a traditional 401 (k) and IRA plans. But for many people planning for retirement, the ability of tax-free withdrawals in retirement, more than compensate for the lack of an initial tax deduction.
The conventional wisdom is that if you think you are in a lower range when you setretire, it is better pre-tax deduction for a traditional 401 (k) and pay taxes when you withdraw the money. On the other hand, if you think there will be the same or higher tax bracket in retirement, it is much better with the new Roth 401 (k).
Many people assume they will be in a lower tax bracket when they stop working. But it might not happen that way. Over the past 25 years, compared to the top marginal federal tax rate of 70% to 35%. OnAt the same time, expand the level of taxes, to expand the use of tax credits and the tax treatment of social control of pensioners' has changed. These trends have increased the likelihood that many pensioners will be in the same or higher tax bracket at retirement. Moreover, with a traditional 401 (k), one can not avoid tax more able to contribute to the income tax. You're just postponing the tax liability for the future.
If you are unsure whether you are better off with taxincome tax deduction now or tax free later, you can always help you invest in both a regular 401 (k split) and the new plan, Roth 401 (k).
That said, if I had one or another commitment, I would bet that most of us will be in a higher tax bracket in retirement. If so, the advantage clearly goes to the Roth IRA.
(c) Larry Holmes
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