Izzie
The Key 401k Pitfalls to Avoid
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2006-06-19 10:20:00
Pair Your 401(k) With a Roth IRA
While it's hard to beat the company match on a 401(k), this shouldn't be your only retirement account. If you're eligible to invest in a Roth IRA, it's a perfect companion to a plan with a match.
If you're single and have adjusted gross income (AGI) under $110,000, or you're married and file a joint return with AGI below $160,000, you're eligible to invest in a Roth. The maximum contribution is $4,000 this year, or $5,000 if you're at least 50 years old.
While you won't get any tax break on the money you invest in a Roth, the contribution grows tax-free, and assuming you follow some simple rules, all of the money will be tax-free when you retire and withdraw it. That's a lot different if you make withdrawals from your 401(k): Every penny will be taxed at your regular income tax rate -- you don't even get to take advantage of the typically lower long-term capital-gains rates.
So if you can Roth, do it! Ideally you can fund a 401(k) to the max as well as invest in a Roth. But if that's too much of a financial challenge right now, use this strategy: If your employer offers a matching contribution to your 401(k), make sure you invest just enough in the plan to qualify for the maximum match, but not a penny more. That should leave you with some extra money to fund the Roth.
And if your employer doesn't even offer a 401(k) match, I would actually make the Roth the first priority. Once you get the Roth funded, you can go back and contribute to your company 401(k).
I like Suzy Orman. Watch her show on the regular basis.
Those are good advice. Now with the new Roth 401(K), we have one more option! Many readers may have come accross the differences between a Roth 401(K) or a traditional 401(K) plan (either from the previous posts in this forum, or elsewhere), but you may not be aware of the difference between a Roth IRA and Roth 401(K).
I will throw out some ideas for your reference on this subject.
Certain individuals here including Heavysnow have briefly introduced the basics about Roth 401(K). I am not going to revamp the wheels and restate the same or similar facts. I have, however, been planning on summarizing the situations (pre-requites) that we may choose Roth 401(K) or pair Roth 401(K) with existing traditional 401(K) to better achieve retirement saving goals.
班班，please advise if I should start another thread on this topic or just start a new one for the discussion convenience.
Minimum Distribution Rules does not apply to Roth IRA
Same as a traditional 401(K) plan, a Roth 401(K) plan is sponsored by an employer. So when you retire, you need to roll your Roth 401(K) to a Roth RIA account.
The minimum distribution rules that apply to traditional IRAs do not apply to Roth IRAs. With a traditional IRA, the required minimum distributions apply each year after you turn 70-1/2. The required minimum distribution for each year is calculated by dividing your IRA account balance as of December 31 of the prior year by the applicable distribution period or life expectancy.
This is a big advantage for people who don't need to draw down their IRAs as fast as those rules would require. The longer you can keep your money in an IRA, the better. The minimum distribution rules do apply to the Roth 401k, but this is not a significant problem. When you retire, you can roll your Roth 401k account into a Roth IRA where the minimum distribution rules won't apply.
(Note: The following two advantages may have been mentioned before, but I just wanted to reiterate to increase your awareness on them)
No Income Limitation & Higher $ Limits
The Roth IRA isn't available to taxpayers with income above certain levels. For unmarried filers, the contribution limit begins to phase out at $95,000 and is completely eliminated at $110,000. For joint filers the contribution limit is eliminated as joint income moves from $150,000 to $160,000. These limits shut the door on the world of tax-free retirement savings for many taxpayers.
The Roth 401k opens that door, because these limits don't apply to the Roth 401k. If you're eligible to participate in your employer's 401k program, and the employer offers the Roth 401k, you can make this choice regardless to your income level.
The dollar limits for 401k contributions are much higher than the limits for IRAs. Assuming you're otherwise eligible, in 2006 you can contribute up to $4,000 to an IRA (including a Roth IRA), or $5,000 if you're at least 50 years of age. The maximum contribution to a 401k (including Roth 401k) for 2006 is $15,000, or $20,000 if you're at least 50 years of age.
Matching Contributions
Watch out, people! We all know that employers don’t match employees Roth IRA. As for Roth 401(K), some employers provide matching contribution to the Roth 401(K), but some don’t. Check with your company’s HR or 401(K) administrative contact first before you make a move….
免费广告 --- more to come on a new thread in the next a day or two on “Should I consider contributing to a Roth 401(K) plan? If so, How much?”
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