Small Business Reading Room


Friday, April 22, 2005

ROTH 401(k) = Investment Options

The age old question- pay now or pay later?

You'll may have more choices next year than before. Starting in 2006, employers have the option to offering the new Roth 401(k) to employees.

Just like it sounds, the Roth 401(k) will combine features from the Roth IRA and basic 401(k) plans. Here are some highlights:


  • Contributions are made with after-tax dollars and grow tax free.
  • All withdraws after age 591/2 will be tax free.
  • Contribution limits will match regular 401(k) plans at $15,000 instead of the Roth IRA plans of only $4,000 for those younger than 50
  • No income initiations to participate

Interested yet?

There are some things to beware of, such as you can't effectively "double" your contribution by simply by having both a traditional 401(k) and Roth 401(k) accounts. The same yearly maximum contribution limits apply to each type of account- or both accounts combined. Also, if your employer provides a matching contribution, that matching contribution must be put into a regular 401(k) account.

As we move closer to 2006, the IRS webpage that has information on 401(k) plans should provide information on the new accounts.

The Roth 401(k) is bound to be a powerful new tool in the retirement account game. If you are any type of incorporated entity, single member LLC, multiple member LLC, partnership, sub-chapter "s" Corporation, or a regular C Corp., talk to your accountant this year about the possibility of implementing a Roth 401(k) for your organization.

3 comments


3 Comments:

Russell:
How long do you think it will be until all savings is tax free? Is that not where we are going by expanding the tax free savings options?

By Blogger Larry, at 3:30 PM  

This comment has been removed by a blog administrator.

By Blogger Russell, at 9:16 AM  

Alan:

Honestly, I don't think that all savings will ever be tax free. That is a fairly progressive government stance.

Does that sound like Uncle Sam to you?

I guess I feel that moves like the ROTH 401(k) is more of a bureaucratic attempt to alleviate some of the government responsibility to provide for the care of it's retired citizens.

As we all know there is a raging debate over the future of social security going on right now- the government wants you to save more so they can obviously eliminate some of most benefits. Remember, Social Security is a promise, not a right or guarantee.If retirement savings can grow tax free, there will be more of those savings around to sustain you into your golden years, and less for the government to subsidize.

The only thing is, for this to work, you have to save or be able to save.

Don't get me wrong, I'm all for tax free savings! Call me a cynic though; I don't think that our elected officials always have our best interest at heart when they throw us a bone like this.

It raises another question for me though-

How do you get people to budget for, or even accept responsibility for their own retirement savings?

It’s hard if not impossible for the average wage earner to max their ROTH IRA, and employer saving plans.

What happens to the American dream if you are constantly worrying about what happens after you can no longer work?

In the end, I think that tax free savings on after tax dollars only sounds good, because it is as good as it gets right now. On the other hand, a change in the tax code, to say a flat tax of 10%, would give even the lowest income Americans an instant retirement savings of 5% over what they currently have.

I recognize that this is not necessarily all that simple. For example, you'd also have to implement policies of government fiscal responsibility to cut spending to make up for the shortage in the tax coffers.

Now that's a novel idea, isn't it?

By Blogger Russell, at 9:33 AM  

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