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Senior Retirement Tips :: 401k Planning
401k Planning: Planning for Tax-Free Income in Your Retirement with a 401K
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401k planning isn’t just about maximizing your contributions and choosing wise investments, it’s also about minimizing the amount of tax you’ll pay in the long term – in your retirement.
Fortunately, there are now two ways you can build tax-free income for your retirement – the Roth IRA and now, the Roth 401(k).
Until recently, the Roth 401(k) didn’t have any income limits, but it was only available if your employer offered a Roth option for your 401(k) plan.
Today, the Roth 401(k) is available to anyone and it’s a great way to sidestep income limits on Roth IRA contributions until 2010 (when the income limits on Roth IRA conversions disappear).
So, what are the benefits of a Roth 401k? How can utilizing the Roth structure help with your 401k planning? To learn how and why, keep reading.
What’s so Great About the Roth 401(k)?
Unlike a traditional IRA or 401k, there are no up front tax breaks with a Roth 401(k) or a Roth IRA, so why bother? Well, Roth withdrawals are actually tax-free in your retirement years (as long as you’re 59 or older and the account is more than five years old).
Even better, Roth accounts are perfect for estate planning. This is because there are no mandatory distribution requirements and the subsequent inheritance for your heirs is tax free.
If you plan to be in the same tax bracket or a higher one when you retire, then the Roth 401(k) is the way to go. You may take a tax hit now, but you’re looking at possibly decades (depending on how long you have until retirement) of tax free earnings on your investment.
In contrast, the earnings on a traditional IRA or 401k are taxed along with your original investment. Now that’s 401k planning.
The Reality of Paying Taxes Now Versus Paying Taxes Later
If you can afford to do some serious 401k planning and take a tax hit now, you could be saving a lot of after tax income for yourself after you retire.
For example, someone with $15,000 in a Roth 401(k) account is significantly better off than someone with $15,000 in a traditional retirement investment.
Why? Because the Roth 401(k) has $15,000 to withdraw while the retiree with $15,000 who finds him or herself in the 33% tax bracket only has $10,000 in actual spendable income. That’s a 50% difference and can make a significant difference in your retirement years.
The Inheritance Benefits of Roth 401(k) Plans
Roth 401(k) plans offer another critical benefit – lower taxes on your legacy. Though the Roth 401(k) requires you to take annual distributions once you reach 70 ½, you can bypass the mandatory withdrawals by rolling the 401(k) into a Roth IRA.
The Roth IRA can then be left to heirs tax free. It’s a great way to build up a large balance in an existing account if you don’t need the funds immediately and want to see it build up free from taxes. Now that’s some long-term 401k planning.
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SeniorRetireTips.com :: 401k Planning