By John Packard
The US Government is sending a strong signal to pre-retirees. “Get your own financial house in order…� Aside of being hypocritical, it is not the end of the message: “because we can’t seem to do anything right.� Translation: Don’t expect government to come to the rescue when retirement comes around. Congress is sitting idly; they are waiting to pass on the social security hot potato to the next group so they won’t have to deal with it.
Without admitting to blatant incompetence, the government has tried to extend a hand of benevolence by offering a few new items to pre-retirees to help them prepare for ‘no’ social security. One account is the 401k Roth account.
This account allows you to contribute to a plan after tax yet the money will grow free of tax and upon withdrawal, no tax is required. (Knock on wood) The Roth 401(K) is an extension of the original Roth IRA concept started a decade ago.
The Roth 401(k) is an even better deal than the more familiar Roth IRA because you can contribute more each year and there are no income-eligibility limits. If your employer offers a Roth 401(k), you can contribute up to $15,500 ($20,500 for workers 50 and older), regardless of income.
Roth 401(k) contributions are not tax-deductible. The accounts are ideal for people who are expecting to be in the same tax bracket or higher when they retire.
Despite their advantages, Roth accounts are not right for everyone. Middle-aged workers who get a late start on retirement savings are unlikely to be in a higher tax bracket in retirement. As a result, they may be better off sticking with a traditional 401(k) and claiming a bigger tax break now.
Although a Roth 401(k) requires annual distributions once you reach age 70 1/2, you can easily roll over the account to a Roth IRA, which has no distribution requirements. And you can leave a Roth account to your heirs tax-free.
Well, The Roth 401 (k) sounds like a good idea. Thanks US government!
My only question is what will happen to the millions of workers who have faithfully paid into the social security system only to not receive any benefits when they retire?
I am a self-employed individual and was wondering, is the Roth 401k only available through employers?If so, what would you recommend for me situation?
Cathy,
You can invest in a Roth if you are self employed. This probably would not be your first choice. A sep IRA will allow you to contribute up to $46,000 per year or 25% of your business net income, which ever is less. It would proably be be best to fund and account like this first then the Roth.