Military Officer - October 2006 - (Page 38) financialforum All About Roths Should you take a tax deduction on your retirement savings now or later? Phil Dyer, CFP, examines the new Roth 401(k) option to help you decide if it’s right for you. T Should You Switch to the Roth 401(k)? ■ Analyze the Roth 401(k) option with MOAA’s Roth 401(k) calculator. Go to MOAA’s online Financial Center at www.moaa.org /financialcenter and click on the Financial Calculators link on the right. he stodgy 401(k) market was shaken up a bit in early 2006 by the introduction of the Roth 401(k) option. Many second-career, retired, and former servicemembers — employees and business owners — are asking, “Should I take advantage of the Roth 401(k)?” The answer, as with many things financial, is, “It depends.” Let’s examine the Roth 401(k) structure: ■ Similar to its older sibling, the Roth IRA, Roth 401(k) contributions come from after-tax dollars and are subject to federal and state taxes before deposit. ■ Money grows tax-deferred and is income-tax free when taken out via a qualified withdrawal. ■ Under current rules, required minimum distributions (RMDs) must be taken from 1 Roth 401(k) accounts at age 70 ⁄ This can 2. be avoided by rolling the money into a Roth IRA, which doesn’t require RMDs. ■ The total amount that can be contributed to all 401(k) plans by an employee is limited to $15,000 annually in 2006, plus an additional $5,000 if you are age 50 or older. The law authorizing the Roth 401(k) will expire at the end of 2010. But the potential for tax-free withdrawals in the future is a powerful lure for some employees, particularly those who might be in the same (or higher) tax bracket when they retire. Active duty military retirees, with their COLA-adjusted retired pay, stand a better chance of a high “final retirement” tax bracket once retired military pay, Social Security, and RMDs from traditional IRAs and regular defined contribution plan accounts (such as the Thrift Savings Plan, 401(k), and 403(b)) are taken into consideration. However, careful analysis is warranted when giving up the certain current tax deduction incorporated in the traditional 401(k) for the promise of future tax-free income. For instance, using a Roth 401(k) could increase your adjusted gross income and phase you out of other tax breaks, such as personal exemptions and itemized deductions. So carefully compare the Roth 401(k) versus the traditional 401(k). Here are some key things to think about: ■ Does my company offer it (or should I offer it for my employees)? The existing 401(k) plan needs to be amended to offer a Roth component, and it does increase the paperwork load slightly for employers and third-party administrators. ■ Company matching contributions, if any, still are made with pretax dollars and therefore are not eligible for Roth treatment. ■ What is your current income and retirement horizon? In general, the younger you are, the more you can benefit from the Roth 401(k) tax-free treatment. The decision to use a Roth 401(k) option is important, so do your homework and look before you leap! MO — Former Army Capt. Phil Dyer, CFP®, is deputy director for financial education, Benefits Information. To find a financial planner near you, contact Garrett Planning Network at (866) MOAA-GPN (662-2476) or www.moaa .org/garrett, or visit www.moaa.org/financial center for other resources. PHOTO: GREG SCHALER 38 MILITARY OFFICER OCTOBER 2006 http://www.moaa.org/financialcenter http://www.moaa.org/financialcenter http://www.moaa.org/garrett http://www.moaa.org/financialcenter http://www.moaa.org/garrett http://www.moaa.org/financialcenter
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