By Kevin McCormally
Now that Congress has made the Roth 401(k) permanent, more firms are offering employees the option to take their retirement-saving tax break later rather than sooner. Despite the growing popularity of the Roth 401(k), it's not right for everyone.Contributing to a Roth means giving up the traditional 401(k)'s immediate break of depositing pretax money. After-tax money goes into the new breed of 401(k), and the money comes out tax-free when it's withdrawn in retirement. With a traditional plan, all withdrawals are taxed in your top tax bracket.
James Lange, author of Retire Secure!: Pay Taxes Later -- the Key to Making Your Money Last as Long as You Do (Wiley, $25), is an unabashed fan of this new breed of 401(k), although he usually supports postponing taxes.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
"With the Roth 401(k), I look at it as paying tax on the seed -- the contribution -- and reaping the harvest income tax-free," he says. "With the regular 401(k), you get a tax deduction on the seed but pay tax on the entire harvest." In most cases, you (and your heirs) will come out ahead with the Roth.
But Lange sees two situations when you should stick to the traditional 401(k). First, he says it makes sense to forgo the Roth if you're in the 33% or 35% tax bracket now and expect to fall into a lower bracket in retirement. Why pass up a tax break worth 33 cents on a dollar now to avoid a tax bill of 15 cents or 25 cents on the dollar a few years down the road?
Also, if the money will go to charity, you should take the traditional plan's up-front tax break. "Charities don't care in what form they get their money, because they do not pay income taxes," he notes.
If a charity will be a beneficiary of your traditional 401(k) -- or subsequent IRA rollover -- you'll save taxes on your contribution and the charity won't pay tax on the distribution.
-
What Is a Qualified Charitable Distribution (QCD)?Tax Breaks A QCD can lower your tax bill while meeting your charitable giving goals in retirement. Here’s how.
-
Embracing Generative AI for Financial SuccessGenerative AI has the potential to reshape how we approach learning about and managing our personal finances.
-
457 Plan Contribution Limits for 2025Retirement plans There are higher 457 plan contribution limits for state and local government workers in 2025 than in 2024.
-
Medicare Basics: 11 Things You Need to KnowMedicare There's Medicare Part A, Part B, Part D, Medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare — and much more.
-
The Seven Worst Assets to Leave Your Kids or Grandkidsinheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
-
SEP IRA Contribution Limits for 2024 and 2025SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $69,000 in 2024 and $70,000 in 2025..
-
Roth IRA Contribution Limits for 2024 and 2025Roth IRAs Roth IRA contribution limits have gone up. Here's what you need to know.
-
SIMPLE IRA Contribution Limits for 2024 and 2025simple IRA The SIMPLE IRA contribution limit increased by $500 for 2025. Workers at small businesses can contribute up to $16,500 or $20,000 if 50 or over and $21,750 if 60-63.
-
457 Contribution Limits for 2024
retirement plans State and local government workers can contribute more to their 457 plans in 2024 than in 2023.
-
Roth 401(k) Contribution Limits for 2025retirement plans The Roth 401(k) contribution limit for 2024 is increasing, and workers who are 50 and older can save even more.
