Today’s record low tax rates with the evitable prospect of higher tax rates (at least for the wealthy) in the future are causing many people to look to the Roth IRA as a way to hedge their bets. With the Roth IRA, you pay your tax upfront on contributions to the account, and withdraw them tax-free during retirement.
If you have a company 401(k), you may want to investigate another lesser-known option available in many 401(k) plans called the Roth 401(k). Stuart Robertson of Forbes describes the Roth 401(k) as a Big Brother to the Roth IRA, saying the 401(k) version of the Roth is bigger and stronger in many ways than the IRA version. You can choose to put some, none or all of your contributions after-tax into your Roth 401(k) savings up to $16,500 a year in 2011, or $22,000 if you are 50 years of age or older. The Roth IRA maximum amounts are much lower: $5,000 and $6,000 if 50 or over respectively.
Additionally, the Roth 401(k) has no income limits which makes it attractive for big earners who don’t need the money. Unlike the Roth IRA, anyone can have a Roth 401(k), if their employer offers it. To invest in a standard Roth IRA and make the maximum contribution, your modified adjusted gross income must be below $107,000 if you are single, $169,000 if you are married filing jointly.
If your company does not offer a Roth option in your 401(k) plan, and you have the say-so to make it happen, you should request it. Typically, this requires an amendment to the plan, and only a minor cost to the business owner.
If you have the income and you think Congress will increase the tax rates on the wealthy, then a Roth 401(k) may be a good way to hedge your tax bet.
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