After admittedly slacking more than usual, I finally opened up a Roth IRA this week! I’m very excited, so much so it’s kind of scaring my wife but that’s okay. Who knew that the hope of tax-free returns could be so sexy? Anyway, all jokes aside I really am excited about finally opening one up. I’m banking on the fact that it’s a given I’ll be in a much higher tax bracket by the time I’m ready to retire, which is a pretty good bet.
The Roth IRA is as close to a slam-dunk as there can be in an investment medium. You put after-tax money in (up to allowable contribution limits) and at age 59 1/2 you can withdraw your earnings tax free! Well, that is if you’ve held the account for at least 5 years, which would be typical of most. Not only that, but a Roth also allows you to take distributions without penalty for certain situations like the purchase of your first home or education costs. One of the best parts about the Roth is that you can withdraw your actual contributions at any time without penalty since you’ve already paid tax on that money. This makes a Roth an attractive option even for those who haven’t completely built up their emergency savings yet, since it can double as an emergency account if need be.
One of the other interesting things is that my employer recently offered a Roth 401(k) option to our retirement plan, albeit with little fanfare. While the Roth 401(k) option sounds extremely attractive to me, I just didn’t know enough about it to make an educated decision. I didn’t want to let a great opportunity slip by, so I decided to do some research. A Roth 401(k) basically blends the contribution levels and no income restrictions of a 401(k) and the tax-free growth of a Roth IRA. While I’ll take a little dip in my net pay each check (since the money gets contributed after tax), but the possibilities of tax-free growth later on are just too appealing.
The thing I was confused about the most was how my employer match would be handled. The employer match always comes out of pre-tax dollars, so it gets put into the regular pre-tax retirement bucket, while your contributions will go into the Roth 401(k) bucket. What I like about this is that it allows you to diversify your retirement allotment to help hedge your bets against what the government will do with taxes. If you’re 20 to 30 years away from retirement, there’s no telling what the government will decide to do with tax rates in that span of time, so it’s best not to put all your eggs in one retirement bucket.
I’m going to continue to do some reading and speak with a financial advisor regarding my specific situation and what would be the best course of action regarding my retirement contributions, but at this point I’m thinking of putting my full percentage into the Roth 401(k). I think that having an equal amount going into a Roth 401(k) and regular pre-tax 401(k), along with my continued contributions to a Roth IRA (until I’m no longer eligible to contribute) will end up being a nice little nest egg over time.
What do you guys think? Should I be jumping at the chance to contribute to a Roth 401(k), or am I just buying into all the hype?
April 9th, 2008 at 8:03 am
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