Roth 401K / 403B: A Big Decision for Beginners | Home Finance Help

There are many advantages to contributing to a Roth 401K/403B, especially for young investors.

Contributions you make towards a Roth 401K/403B are included in the current years gross income. After 59 1/2, your withdraws are tax free.

There are a few basics to understand before making the decision between a Roth and a Traditional plan:

• You can own more then one simultaneously
• You can designate a percent of your contributions, from 1% to 100%, into a Roth 401K/403B
• Matching contributions made by your employer are never taxed, and therefore will be made towards a Traditional account

Advantages to Roth Contributions

• Value of contributions has increased
• You can pay taxes while your income is low, and withdrawal tax free while your income is high
• Not included in your income during retirement when deciding if your social security is taxable or not
• Can rollover into a Roth IRA
• No income restrictions like a Roth IRA
• If your in a 25% tax bracket, you actually have to take out $1,333 in a Traditional plan for $1,000, but not in a Roth, $1,000=$1,000

Disadvantages to Roth Contributions

• Not available in all types of 401K?s (solo, safe harbor?) and still coming into existing plans
• Less money compounding if your contributing minimums

Here are a couple of tips for choosing how to make your contributions.

If you think your taxes or tax bracket will increase then choose the Roth option. For younger professionals in 15% tax brackets who expect their income to grow, contributing towards a Roth would be a wise financial decision.

If you plan on your taxes decreasing, it?s not smart to contribute to a Roth. You would be paying a higher tax now then during withdrawals.

For young adults, hopefully your career will involve a salary increase. This is where a Roth 401K is a great advantage. You?re paying taxes while in the lowest tax bracket. Once your into the higher tax brackets, you can always reevaluate the decision.

There can be one more scenario when contributing to a Roth can be a advantageous. If you?re getting near maximum contribution limits, contributing to a Roth can increase the value. Traditional and Roth 401K / 403B?s have the same contribution limit. However, contributing $15,500 after tax has more value then $15,500 pre-tax.

If you are unsure of where your taxes will be, you can always contribute to both. It?s a great hedge bet to protect yourself if your tax bracket were to go up or down.

Source: http://www.thehumblemumble.com/roth-401k-403b-a-big-decision-for-beginners/

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