Have you ever wondered why people invest into the Roth 401(k) rather than the traditional tax-deductible 401(k) plan? If so, you’re reading the right blog to find out!
Traditionally, employers only offered a tax-deductible 401(k) plan to their employees. But now, most employers also offer a Roth 401(k) plan. Employees have learned the benefits of the Roth 401(k) – tax-free growth! Yes, you read that correctly – tax-free growth! What does that really mean? First, it means that your contributions to the Roth 401(k) are taxed before they go into the account at your current income tax bracket. Second, it means that your contributions and all the growth on them will never be taxed while both in the 401(k) and when you start taking withdraws.
How does a tax-free withdraw benefit you in retirement? Most people will have a variety of income streams in retirement: Social Security, traditional 401(k) and IRA withdraws, perhaps a pension, and investment income from taxable accounts. It’s possible that these income streams can push you into a higher tax bracket, affect how your Social Security is taxed, and even affect your Medicare premium. By withdrawing dollars from your Roth account, you can potentially avoid the higher tax bracket and lower your overall tax liability. There are also NO mandatory Required Minimum Distributions (RMDs) at age 72 unlike a traditional 401(k) and IRA. If you don’t need the money, then just leave it in your account and let it keep growing tax-free. Therefore, using a Roth account can provide you flexibility in retirement.
For more information, schedule a meeting with a SWMG retirement expert today!