Deciding Between Traditional and Roth 401(k)s | Law Firm Newswire

Deciding Between Traditional and Roth 401(k)s

Hook Law Center (formerly Oast & Hook)

Hook Law Center (formerly Oast & Hook)

Virginia Beach, VA (Law Firm Newswire) October 2, 2015 – When faced with the decision of whether to invest in a traditional or Roth 401(k) plan, many U.S. taxpayers find themselves weighing the advantages and disadvantages of each retirement option. A traditional 401(k) plan is offered by an employer to its employees.

Such a plan represents the most typical type of defined contribution retirement plan. The employee decides the amount of the contribution he or she would like to make, and the employer deducts a percentage of the employee’s salary from his or her paycheck; the deducted amount is then deposited into the account on behalf of the employee.

The beneficial tax treatment offered by 401(k) plans consists of the deduction of “pretax” dollars from one’s paycheck prior to the time at which taxes are taken out. The end result is that one will be required to pay taxes on a reduced amount of income. It is only upon retirement that one will have to pay taxes on withdrawals from the 401(k) plan at the taxpayer’s ordinary income tax rate. However, if one were to withdraw funds prior to reaching age 59 ½, one would usually have to pay a 10 percent penalty in addition to any taxes owed.

“It is important to make wise investment decisions with regard to one’s retirement plan. Otherwise, one may make mistakes that could adversely impact one’s future,” said Andrew H. Hook, a Virginia elder law attorney with Hook Law Center, with offices in Virginia Beach and northern Suffolk.

Another retirement plan that provides more favorable tax treatment is the Roth 401(k). While the Roth 401(k) requires one to pay taxes on amounts contributed to the plan, it does not subject one to the payment of tax upon the withdrawal of funds at retirement. In this way, one’s account grows tax-free. However, one must adhere to the minimum distribution rules of Roth 401(k) plans. Thus, after the age of 70 ½, one will have to start withdrawing funds from the account.

In deciding whether to invest in a Roth or a traditional 401(k), one must ascertain whether the tax savings offered by the regular 401(k) will exceed those provided by the Roth. For instance, if one is relatively young or is not in a high income tax bracket, then a Roth may be a wise option. Although one will be taxed on one’s contributions, the tax savings are unlikely to be significant if one is in a low income tax bracket. By investing in a Roth 401(k), one can avoid taxes during retirement.

Hook Law Center
295 Bendix Road, Suite 170
Virginia Beach, Virginia 23452-1294
Phone: 757-399-7506
Fax: 757-397-1267

SUFFOLK
5806 Harbour View Blvd.
Suite 203
Suffolk VA 23435
Phone: 757-399-7506
Fax: 757-397-1267
http://www.hooklawcenter.com/

  • Elder Law Related Updates in 2020
    Every July, various amendments to the Virginia Code go into effect. This year, several notable changes to the law impact various areas of elder law, a summary of which are as follows: The state police must develop the Virginia Missing Child with Autism Alert Program. Local law enforcement may participate in the state program, or [...]<p><a class="btn btn-secondary bravehart-read-more-link" href="http://www.hooklawcenter.com/2020/07/10/elder-law-related-updates-in-2020/">Read More...</a></p>
  • The Importance of Updating Beneficiary Designations
    Life is pretty hectic. Between work, personal commitments and family, it’s no surprise that we sometimes let important things slide from time to time. We know we need to get to them, but the days get away from us and most of the time it seems like these little things can just as easily wait [...]<p><a class="btn btn-secondary bravehart-read-more-link" href="http://www.hooklawcenter.com/2020/07/06/the-importance-of-updating-beneficiary-designations/">Read More...</a></p>
  • Stimulus Payments Belong to Recipient, Not Nursing Homes or Care Facilities
    Following concerns that businesses may be taking advantage of those who received an economic impact payment, the Internal Revenue Service recently notified nursing home and other care facilities that the recent stimulus payments received by many Americans generally belong to the recipients, not the organizations providing the care. This means that these payments do not [...]<p><a class="btn btn-secondary bravehart-read-more-link" href="http://www.hooklawcenter.com/2020/06/26/stimulus-payments-belong-to-recipient-not-nursing-homes-or-care-facilities/">Read More...</a></p>
  • Planning to Transition a Small or Family-Owned Business
    Estate planning often involves the transition of a small or family-owned business to the next generation. Despite best plans and practices by estate planners and business coaches, this transition often fails, leaving dissatisfied families and employees in the wake of the transition. Unfortunately for estate planning attorneys, the failure of business transition does not lie [...]<p><a class="btn btn-secondary bravehart-read-more-link" href="http://www.hooklawcenter.com/2020/06/19/planning-to-transition-a-small-or-family-owned-business/">Read More...</a></p>
  • Beware of COVID-19 Scams
    Criminally-minded individuals will choose to take advantage of almost any situation if they perceive a possible benefit to them.  Unfortunately, the coronavirus pandemic is no exception.  As of June 4, 2020, the Federal Trade Commission estimated that coronavirus-related scams have cost Americans $46.2 million.  There are several scams related to the COVID-19 crisis that everyone [...]<p><a class="btn btn-secondary bravehart-read-more-link" href="http://www.hooklawcenter.com/2020/06/15/beware-of-covid-19-scams/">Read More...</a></p>

Tags: , , , , ,



Get headlines from Law Firm Newswire sent right to your inbox.

* indicates required