A NEW 401(K) OPTION...Last year, Congress authorized a new twist to the standard 401(k) plan that most employers offer. The new option, called a Roth 401(k) is just what it sounds like, a blend of the standard 401(k) and a Roth IRA. So what's the difference? As opposed to the standard 401(k) plan, where the initial contributions are not taxed, but your future withdrawals will be taxed, the Roth 401(k) allows for the opposite, which means that your contributions will be taxed today, but your withdrawals will not be taxed. Of course, you do not pay tax on either type of account on an annual basis, as opposed to the capital gains taxes that are imposed on investments held outside of retirement accounts. Which is the better option? First and foremost - regardless of which option you choose - it is always a good plan to be investing for your retirement, especially when you are able to achieve tax benefits as a result. You can select the best option for you by anticipating if your tax rate will be higher when you retire than it is today. If you are younger and just starting your career, it is likely that your current tax rate is lower than it will be in your retirement. Conversely, if you are in the height of your earning years, the reverse is probably true--your retirement income will likely be lower than your current earnings. The wild card is that the government may change the existing tax brackets by the time you retire. So will taxes 20, 30, 40 years from today be higher or lower than current rates? While no one has a perfect crystal ball, and wanting to avoid a political discussion about economics, it would probably be safer to assume that taxes will be higher in the future than they are today. And if taxes withheld from your retirement are less, then it will give you more to spend. Availability At this time, only about 20-25% of employers are offering the new type of plan, but the number of participating companies is expected to grow steadily - so ask your human resource department about it if you are interested. Also, note that any payroll match that you receive from your employer will be based on the standard 401(k) plan and be taxed at withdrawal. Sincerely,
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