Saturday, October 20, 2007

Should You Invest In A Roth 401(K)?

Recently BusinessWeek had a quiz on this subject. As more and more employers are offering this option - this set of questions can provide some guidance when picking the Roth option.

  • Pay tax now - Regular 401(k) contribution is pretax whereas Roth 401(K) is after tax. If you need the money now then regular 401(K) may be the way to go.
  • Grow your account over time - In a Roth account your money grows tax free and there are no taxes when you withdraw. If you expect substantial earnings over a long period of time then Roth is the answer.
  • Withdrawing your money - Roth can be converted into an IRA thereby giving you an option to withdraw money later than the mandatory withdrawl age of 701/2.
  • Pay tax later - Consider your tax bracket post retirement. A higher tax bracket means Roth may be a better option since withdrawl from a Roth will be tax free.

  • References:
    Business Week Quiz - Should You Switch to a Roth IRA? - 401(K) Center
    Business Week - How to Make the Most of Your 401(K)

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