Most people understand the virtues of a 401 (k) in terms of saving for retirement. Still, few know that there is another employer-sponsored plan that can work just as well, if not better.
As a traditional 401 (k), a Roth 401 (k) can help you contribute up to $ 19,000 a year through automatic payroll deductions and can bring the big bonus of an employer match if your business offers it.
One of the main differences is that contributions to a Roth 401 (k) are taxed in advance, so retirement withdrawals are tax-free (as long as you are 59 or older and you have kept that account for at least five year).
For workers who are going to be in a higher or the same tax console down the road ̵[ads1]1; like the millennia, in particular – it's a big advantage over a traditional 401 (k), where there are no contributions to the money withdrawn. At that time, money taken out in pension tax is taxed at your ordinary income rate.
In this way, the Roth 401 (k) plans are similar to the better known Roth IRAs, except that there is no revenue limit for who can participate in a Roth 401 (k) – and the maximum annual contribution for workers under 50 years are more than three times higher.
In addition to $ 19,000 a year, you can save in a Roth 401 (k), there is also a $ 6,000 raise if you are over 50 years old. With a Roth IRA you can contribute $ 6,000, with an additional $ 1000 if you're 50 or older.
In the back, the IRS requires you to start withdrawing from your Roth 401 (k) aged 70½. A Roth IRA does not have this requirement.
Currently, only 11% of employees contribute to a Roth 401 (k), up only 3% over the past five years, although about 7 out of 10 companies now offer a Roth option, according to Fidelity Investments, the largest provider of 401 (k) Plans.
"Making sure you contribute to employer-based plans is important, either Roth or not," said Meghan Murphy, a vice president at Fidelity. (Financial advisers usually recommend contributing at least enough to capture the entire employer battle.)
Of course, it doesn't have to be one or the other. Many counselors recommend using both types of pension plans, if possible.
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That way, you can put together a tax-efficient strategy for your golden years: ie, pushing the accounts that allow tax-free withdrawals first – for example Roth accounts and broker accounts, which are only taxable when you sell valued assets to distribute money.
"It is useful to have several different drawers to withdraw," said Kristen Moosmiller, a certified financial planner at NorthAvenue Financial Advocates in Columbus, Ohio.
" With a Roth you not only build a bucket after tax, you build up tax-free growth over time," she added.
Without such a strategy, the tax bill can be a rude surprise in retirement. Nearly half of the recent retirees want them to plan better to handle retirement taxes, according to a Nationwide Retirement Institute survey. One in 4 report has paid thousands of dollars more in retirement tax than they had expected.
To reduce the battle, work with an advisor to determine the best way to grow your nest and then how much to draw from which sources the time will retire, maximize income and minimize the tax bill.