Many people save for retirement using a traditional 401(k). However, a Roth 401(k), which is the post-tax version, is gaining popularity and offers several advantages that could leave you with more money in retirement and benefit your heirs.
Key differences between Roth and traditional 401(k)s*:
Taxation: With a Roth 401(k), contributions are taxed upfront, but withdrawals in retirement are tax-free. With a traditional 401(k), contributions are tax-deductible, but withdrawals in retirement are taxed as income.
Income Restrictions: Roth 401(k)s have no income restrictions for contributions, unlike Roth IRAs.
Why Roth 401(k)s are becoming more attractive:
Tax-free growth: Recent changes in tax law allow you to keep your Roth 401(k) intact through retirement without required minimum distributions (RMDs), maximizing tax-free growth.
Benefits for heirs: The elimination of RMDs allows your Roth 401(k) to keep growing, leaving a larger inheritance for your beneficiaries. Additionally, Roth 401(k)s have clear rules for withdrawals by heirs, unlike traditional 401(k)s and IRAs.
Appeal to high earners: Roth 401(k)s are attractive to high-income earners who cannot contribute to Roth IRAs due to income limits.
Overall, Roth 401(k)s offer significant advantages in terms of tax-free growth, benefits for heirs, and flexibility for high earners. Consider whether a Roth 401(k) is the right choice for your retirement savings strategy.
Articles and Commentary
Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Tamalpais Asset Management’s (“TAM”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. TAM does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. TAM has obtained the information provided herein from various third-party sources believed to be reliable but such information is not guaranteed. Certain links on this site connect to other websites maintained by third parties over whom TAM has no control. TAM makes no representations as to the accuracy or any other aspect of information contained in other websites. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. TAM is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of TAM.
Comments