By Matthew Gaude & Shawn McGuire
Does your employer offer both Traditional 401(k) and Roth 401(k) options? Are you confused about which one may be right for you? For most of us, it’s hard to know if we’re better off paying taxes on our retirement dollars now or later. Roth 401(k)s have many tax-free benefits, but there are also some disadvantages worth discussing.
In light of the potential Senate passing of the Secure Act, here are 6 things you should know about Roth 401(k)s and Traditional 401(k)s.
1. You Can Have A Traditional 401(k) & A Roth 401(k)
If your employer matches your contributions to your Roth 401(k), you will technically have both types of retirement accounts by default. Your personal contributions go to the Roth (after-tax) portion of your 401(k). Your employer’s contributions go to the Traditional (pre-tax) portion of your 401(k). In the end, you have both a Traditional and a Roth 401(k).
Whether you want to contribute to a Roth 401(k) depends on your current tax bracket and your expected tax bracket in retirement. If you’re in a lower tax bracket right now, you may benefit from a Roth 401(k). If you’re in a higher tax bracket, it may be hard to justify paying high taxes on your retirement dollars today when you’ll likely be in a lower tax bracket in retirement.
2. Contribution Limits For A Traditional 401(k) & A Roth 401(k)
The contribution limit for a Traditional 401(k) and a Roth 401(k) are exactly the same. For 2019, you can contribute up to $19,000 if you’re under the age of 50. If you’re age 50 or older, the contribution limit is $25,000. (1) Just remember, you’ll pay taxes up front for any contributions made to your Roth 401(k).
3. You Can Have Both A Roth 401(k) & A Roth IRA
As long as you meet the requirements for a Roth IRA (outlined below), you can have both types of accounts.
The contribution limit for a Roth IRA is $6,000 plus an additional $1,000 for employees age 50 or over. Currently, you can’t contribute to an IRA past age 70½, but under the Secure Act, this age limit would be removed.
You qualify for a Roth IRA in 2019 as long as: (2)
- Your income is no more than $203,000 if you’re married
- Your income is no more than $137,000 if you’re single
This means if you’re over the age of 50, you can contribute $25,000 to your Roth 401(k) and $7,000 to your Roth IRA—a total contribution limit of $32,000 for the year! If you’re married and your spouse is over age 50 as well, they can contribute the same amount.
4. Your Employer Still Matches Your Roth 401(k) Contributions
Remember that when your employer matches the contributions you make to your Roth 401(k), they go into the Traditional (pre-tax) side of your account—so you technically have a Traditional and a Roth 401(k). When you have both accounts, you’re “tax hedging” your retirement dollars (this is a good thing). When it’s time to start taking distributions, you’ll get to choose the most tax-efficient way to draw from these accounts.
5. Converting Your Traditional 401(k) To A Roth 401(k) May Save You Money
If it makes mathematical sense for you to convert your Traditional 401(k) to a Roth 401(k), do it. Key things you’ll want to consider include:
- Your age
- Current tax bracket
- Expected tax bracket in retirement
- How many years you are from retirement
- Your filing status (married or single)
- Other income streams in retirement
There are a lot of moving pieces to calculate when trying to decide if it makes mathematical sense for you, so contact a trusted financial professional who can help.
6. Invest Your Roth 401(k) Contributions For Growth
One major benefit of a Roth 401(k) is that your money grows tax-free. Because of this, you want to focus on investments that actually grow. Bonds have historically earned an average return of 3.4% (3) while the average return of the S&P 500 has been 10%. (4) This means you need to limit the number of bonds you invest in and focus on stocks.
How We Can Help
Given the complexity of your life, it can be difficult to determine the most efficient way to invest your retirement dollars. At Live Oak Wealth Management we’re committed to taking the complexity out of saving for retirement. We help manage your retirement accounts and simplify your financial life so you can focus on the things that matter most to you. To learn more, call our office at 770-552-5968 or email [email protected]. Or, if you prefer, you can simply click here to schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insights and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc. (APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk, and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.