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My company offers a 401(k) and a Roth 401(k), and I currently contribute to both; should I put all of my contribution money toward the Roth 401(k)?

My company offers a 401(k) and a Roth 401(k). Currently I contribute 6 percent to my 401(k) and 8 percent to my Roth 401(k). Is this a good long-term strategy? I want to contribute all to my Roth 401(k) starting in 2019. Is that a better strategy? Also, can I take out my principal if needed from my Roth 401(k) since it’s after-tax dollars?

Financial Planning, Retirement, 401(k), IRAs, Taxes
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October 2018

My company offers a 401(k) and a Roth 401(k). Currently I contribute 6 percent to my 401(k) and 8 percent to my Roth 401(k). Is this a good long-term strategy? I want to contribute all to my Roth 401(k) starting in 2019. Is that a better strategy? Also, can I take out my principal if needed from my Roth 401(k) since its after-tax dollars?

The benefit of contributing to a 401(k) is that the money goes in pretax. This lowers your taxable income today. When you take qualified distributions in the future, the amount will be taxed as ordinary income. Contributions to a Roth 401(k) comes from after-tax money, which will cost you more up front. However, qualified distributions will be tax free. So, the debate really comes down to comparing your current tax rate with your future tax rate at retirement. If you expect your tax rate will be higher at retirement and prefer to pay taxes at a lower rate now, then a Roth 401(k) is the better option. If you believe your tax rate at retirement is going to be lower than they are today, then contributing to a 401(k) today will save you more on taxes. For most people, the answer is not so clear cut. By having both accounts, it gives you the flexibility to manage your gross income in the future to ascertain a certain income threshold.

Besides taxes, you need to also know that a 401(k) requires the account owner to take required minimum distributions at age 70 ½. This is still true even if you rollover your 401(k) to a traditional IRA. If you rollover your Roth 401(k) to a Roth IRA, you can avoid required distributions. Some use this strategy to pass on to their heirs.

If you plan document allows you to take money out of your Roth 401(k), the amount will be prorated between your original contribution and the earnings.  Assuming you don’t meet the requirements for a qualified distribution, age 59 ½ or disabled, the earnings part of the distribution will be taxed and is subject to a 10% penalty. Unqualified withdrawals are meant to be punitive.

October 2018
October 2018
October 2018
October 2018