Michael on January 7th, 2008
Bookmark and Share

Entering 2008, the “new” Roth 401(k) is a hot topic lots of people want to talk about. Although this plan has been around for a couple of years, most employers did not decide to make it available to their employees until some recent additional Congressional tinkering made its existence permanent. I recently had a conversation about the Roth 401(k) that I thought you would enjoy.

My employer recently opened an option for employees to opt into a Roth 401k. It seems to make sense for me, as a young newish employee, to do Roth over traditional (i.e. tax along the way rather than at the very end). What do you think?

Roth 401(k) vs. Regular 401(k)

Like the Roth IRA, contributions to a Roth 401(k) are post-tax. This means that you can’t deduct your contribution from your taxes. On the other hand, that’ the only tax you’ll ever pay with regard to that money. Both the growth and the eventual distribution of the money in retirement are tax-free.

My only caution is the possibility that Congress decides it needs the money some day and decides to tax the previously tax-free growth.

You: Can they do that?

They’re Congress.

You: Have they done that before?

Tax something that was previously not taxed?

You: Yes.

Yes.

You: Wow. That sucks.
Indeed. Personally, I believe in diversification amongst the tax categories. In other words, you’ve already contributed to a 401(k) in prior years (and possibly traditional IRAs as well). Having Roth money provides another form of tax protection. While you never know what the government will want to take from you someday, the truth is you really never know. Still, absent law changes, the Roth is a no-brainer for someone young. It’s a smart move, even with my crystal-ball lacking caution.

But wait, there’s more!

If you are able to save the same $2,000 in a Roth 401(k) as opposed to the $2,000 you would have otherwise saved in a regular 401(k) AND you overall other spending/saving is unchanged, you would effectively be saving more as a percentage of your income because your net income went down (to the loss of your regular 401(k) tax savings). That’s a huge step towards living Beyond Paycheck to Paycheck, don’t you think?

Bookmark and Share

Leave a Reply

You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>