Make Use of Your Roth Option

by Investing School on October 29, 2011

If you are fortunate, your employer sponsored qualified plans include an option for Roth tax treatment of contributions you make. This would allow you to deposit money into your retirement plan after taxes. This option may be available for 401(k) or 403(b) retirement plans.

Of course some would argue that if you qualify for a Roth option you are already fortunate, since they are designed for employees who already have incomes which are too high to allow them to make Roth IRA contributions. By consistently putting money away through a Roth option you can amass a relatively huge sum of tax free cash by the time you are ready to retire.
Since the contributions are made with after-tax funds the account grows tax-free. Withdrawals you make during retirement won’t be taxed either, as long as you are at least 59 ½ and the account has been held for a minimum of 5 years. You are effectively exchanging your up-front tax deduction which you would have with a more traditional retirement account, but the potential for gain is considered to be greater.

You can contribute as much as you want to a Roth option 401(k) since income limits are not applicable. If you were contributing the same amount of money in a traditional Roth IRA the funds would be taxable as well, possibly reducing your return.

Considering the likelihood that Social Security will be a thing of the past when the people entering the work force now are ready to retire, any savings plan which is designed to maximize retirement savings is a good thing.

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