Roth 401(k)s May Offer Greater Tax Flexibility
Virginia Beach, VA (Law Firm Newswire) July 29, 2014 – Employers who offer 401(k) retirement savings accounts are increasingly providing the option of a Roth 401(k). This presents workers with the same question that IRAs do: which to choose, traditional or Roth? According to a prominent Virginia estate planning attorney, the choice depends on individual circumstances, but Roth 401(k)s may generally offer greater tax flexibility.
“When an employer offers the option of contributing to both a traditional 401(k) and a Roth 401(k), it can be wise to make at least some Roth contributions,” said Andrew Hook, an attorney with the Hook Law Center. “That way, in retirement, one can take distributions from the traditional 401(k) until the top of a tax bracket is reached, and then take additional tax-free Roth distributions.”
Part of the decision depends on when one wishes to pay taxes. With a traditional 401(k), funds are contributed pre-tax, meaning that they do not count as taxable income at the time the contribution is made. However, the funds and any earnings are taxed as ordinary income when distributions are made in retirement. An advantage to a traditional 401(k) is that if, as with most retirees, one's income is reduced in retirement, the tax burden may be lessened within a lower tax bracket.
With a Roth 401(k), one pays tax on the income before funds are deposited in the account, but withdrawals in retirement may be tax-free. Some younger workers prefer a Roth 401(k) because they believe that they will be in a higher tax bracket after they retire than they are now. Whether or not it turns out that way for an individual saver, Roth accounts do have the advantage that earnings may grow tax-free, and younger workers have a longer time for their savings to grow before retirement. And, according to Hook, having some funds in a Roth account can give retirees greater flexibility at tax time.
Hook Law Center
295 Bendix Road, Suite 170
Virginia Beach, Virginia 23452-1294
5806 Harbour View Blvd.
Suffolk VA 23435
- Home Upgrades to Help Aging in Place
Many individuals want to stay in their home through old age. Frequently, our clients are concerned that their home is a poor place to age in place because it is two-story, split-level, or simply old. Also, many are unwilling to move to a new home in order to accommodate decreased mobility due to their connection […]
- Address these essential elements of retirement planning
During your retirement years, you may expect to receive Social Security payments. A few people may also receive payments from public or private pension plans. However, it is best not to rely on such sources to provide a sufficient amount of income to ensure that you retire comfortably. Although you may receive income from both […]
- Department of Defense Rolls Out a New Retirement Plan
The Department of Defense has unveiled a new retirement plan that will go into effect on January 1, 2018. The new “blended” plan will not impact a majority of the currently enlisted members, but will present a complex financial decision for mid-career service members with less than 12 years of service. The new plan is […]
- The Effect of Divorce on Your Estate Plan
An unfortunate, but common, scenario: You and your spouse get divorced. You remarry, but die shortly thereafter. Your loved ones discover that amidst all the excitement of your divorce and remarriage, you forgot to update your estate plan. Your will and beneficiary designations all leave everything you own to your first spouse. What happens now? […]
- How net investment income can affect tax planning
There are two ways in which the 3.8 percent net investment income tax (NIIT) can have an impact on your estate plan. It can raise your tax on capital gains, taxable interest and other investment income, thereby lowering the amount of wealth that is accessible to your family. The tax is also especially severe toward […]