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Guide-to-Retirement-Plans.com, April 30, 2008
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If chances are good that you will be in a lower tax bracket in retirement, making pretax contributions is a better option. You avoid
paying taxes at the higher rate now, and will pay them at the lower rate when you retire.
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Do you make too much money to contribute to a Roth IRA?
You cannot make contributions to a Roth IRA if your adjusted gross income (AGI) exceeds $160,000 for married couples filing jointly, or $110,000 for single-filers.But, there are no income limits when it comes to making contributions to a Roth 401k. So if you make too much for a Roth IRA, you can still contribute to a Roth 401k.
While making too much money to contribute to a Roth IRA is not going to earn you any votes of sympathy from the many hard-working Americans earning minimum wage, in some cases making too much money can be a hindrance (albeit a small one)!
Are you well set for retirement?
If you are already pretty well established when it comes to your retirement plans, and you know your financial outlook is good, there is no reason you shouldn?t contribute to Roth. A little tax-diversification never hurt anybody.Now let's take a look at who might be better to stick with pretax contributions:
Are you older with less saved than you would ideally like?
If this is you, then you will probably rely on income from Social Security to pay most of your bills. What this means to you is that you will likely move into a lower tax bracket in retirement since you won't have the income from an employer. Plus, at certain thresholds income from Social Security is not taxed.If chances are good that you will be in a lower tax bracket in retirement, making pretax contributions is a better option. You avoid paying taxes at the higher rate now, and will pay them at the lower rate when you retire. However, tax diversification is a topic you need to be familiar with.
Are you a low-to-moderate-income family with children?
This is a pretty broad scope and likely encompasses a great deal of people out there, but we're targeting specific people here.If you have children and are eligible for certain types of tax credits such as Earned Income Tax credit or a Child Tax credit, you may want to look at this more closely.
If your income is teetering on the edge of the threshold that may make you ineligible to receive certain types of tax credits such as these, making Roth contributions may hurt you since you are not reducing your taxable income.
Rather, making contributions on a pretax basis lowers your overall taxable income. And if you were teetering on a threshold, the pretax contributions you make may very well put you below that threshold keeping you eligible for the tax credits. Think about it! Consult a tax professional if you need help with this.
Here is a great article on the Roth 401k by Money Magazine senior editor, Walter Updegrave.
Go to our page on Roth 401k's.
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