A lot of 401(k)s now have a Roth option, and many clients want to know if they should choose them.
With Roth contributions to your 401(k), you don’t get the current tax deduction, but then when the money comes out, you don’t pay taxes on it. It’s tax-free; tax-free is a good thing.
It’s a complicated decision and the answer naturally depends. You need to know (or guess) if your future tax rates are going to be higher or lower than they are now.
For a lot of our clients, who have higher than average incomes, the pretax 401(k) traditional option is probably best, but it depends.
For a lot of younger or lower paid people who aren’t paying much in the form of federal taxes, the Roth option is probably best.
The first step is figuring out what your effective tax rate it. You do that by dividing your total federal income tax by your gross income. The answer is your effective tax rate. If it’s really low, like under 10%, we’d probably lean toward the Roth. If it’s really high, like over 25 or 28%, we’d lean toward sticking with the traditional pre-tax option. In between those rates, it’s more complicated.
It is something that we can help people figure out. We can look at tax rates and projected tax rates and make recommendations.
My name is Mike Garry, and my company is Yardley Wealth Management. We are a fiduciary, fee-only financial planning, and wealth management firm in Newtown, Pennsylvania. (That’s in Bucks County). Our law firm is Yardley Estate Planning, LLC and is in the same place. We only do Estate Planning work and I am licensed in Pennsylvania and New Jersey.
If you’d like to talk about this or anything else, please reach out: 267-573-1019, [email protected] or @michaeljgarry