Categorized | Retirement

Roth 401(k)

Every wage earner is eagerly looking towards retirement and the best ways to fund that retirement. Whether it be investing for long term gains, buying IRA’s or bonds or simply just putting money aside every month for the rest of your working career, we are all looking to achieve the same goal. 401(k)’s are the more traditional route wage earners take because it has replaced pensions. A traditional 401(k) is a great way to save for your retirement funding, but what if there was another way? Like investing your retirement fund into a Roth 401(k).

What is a Roth 401(k)?

A Roth 401(k) is like a traditional 401(k) in that it is a fund in which both you and our employer will pay into during your time at a roth 401(k)company. The best part about a Roth 401(k) is also the very same that is the best part of a Roth IRA, any money put into the fund is all taxed up front. Unlike a traditional 401(k) where you would put a percentage of your income into it, when it came time to start pulling from the fund, you would be paying taxes on every withdrawal. When it comes to a Roth 401(k), and you reached the age of 59 and a half, you would be able to start taking money from your 401(k) and not have to pay a single cent. You would have already paid the tax up front. The benefits of funding your retirement this way is that when you retire and will need the money you had put away when you were working.

Tax Brackets

While you are young and in the work force, chances are that you will be in a higher tax bracket than when you retire. The benefit to the younger workforce, or even middle aged workers, is that if you pay the taxes up front while you are working, you can enjoy the money later on. The percentage of taxes to be collected depending on income may go up in time, so like when you borrow a loan you may in fact end up paying less over time when you pay the taxes up front, as opposed to paying the taxes on the back end like any traditional 401(k) would have you do. Regardless of what you earn, a more median wage or if you are a higher wage earner, the benefits of understanding how a Roth 401(k) works can have a great impact on your long term finances.

Understanding 401(k)’sroth 401(k) 2

401(k)’s are one of the best options when looking to finance retirement. They offer an ability to set aside money that can be matched by your employer and the fees associated with early withdrawal are steep enough to ensure many roll them over when leaving and entering a new job. That being said, 401(k)’s also have rules when it comes to taking the money from them. The IRS will start taxing you on required minimum distribution of funds when you turn 70 and 1/2. The reasoning behind this is that because by law you are supposed to be pulling from your 401(k) so that the IRS can tax you on the money you’ve been putting aside for years but have not been taxed on yet. So while you may put away X amount of money, really you have only put away X amount of money minus the tax percentage of Y (or X-Y%= Net retirement funds). The older you get, depending on what the cost of living is at and any unpredicted medical expenses, you might has much less than you had prepared for. The need for a predictable and formal number might be something you would want to be able to count on later in life.

A Roth 401(k) works in pretty much the same format but you can pull from it sooner and with no taxes pulling from your overall funds. While the traditional 401(k) was worth X-Y%, with you paying the taxes up front what you saved over time was the number you’ve got posted. If you paid Y% up front, then your net retirement funds are simply worth X.

The key to a financially secure retirement, comes from the willingness and determination in properly funding for your golden years. Looking at and weighing all options is the best way that you can properly prepare. That being said, looking at 401(k)’s for one of the best ways to save for your later years can come with benefits virtually unseen upfront. Look at all your options and take the time to research and develop a plan for investing your retirement funding into a Roth 401(k) so that you can enjoy the money you’ve worked so hard for. No need to sacrifice the comfort of your golden years because of the normal or more traditional ways to save.



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