June 25, 2009

If you have been listening to this show for any length of time at all, you have no doubt heard me sing praise of the Roth IRA. The Roth IRA is an amazing planning tool for those individuals who qualify. Not only do you get tax deferred savings for retirement, but all of those earnings actually become tax FREE if certain requirements are met! To make the deal even sweeter, there are no Required Minimum Distributions at age 70 and a half like there are with qualified retirement plans or other types of IRAs. But maybe you are one of those individuals who is no longer eligible to contribute to a Roth IRA due to income limitations. Is there a way for you to get a piece of the tax free pie? Or perhaps you are maxing out your Roth contributions, and you feel that the Roth contribution limit ($5,000 for 2009) isn’t quite enough to provide for the retirement of your dreams. Is there a way for you to sock away more and still receive potentially tax free growth?

The answer is YES! Yes there is! The way to do this through the relatively new Roth 401k option offered by many employers. If your employer doesn’t offer a Roth 401k or 403b option, then take notes as you listen to the show and it may be worth it to schedule a meeting with the decision makers at your firm.

Before I get into all of the benefits available through a Roth 401k, you may be asking why Uncle Sam would be willing to fore go all of that potential tax revenue? The answer is because the federal government has realized that they are in trouble. As you’ve heard in previous shows, Social Security has some very serious problems right now, and it’s only going to get worse going forward. This, coupled with the near extinction of defined benefit retirement plans, has allowed the government to realize that the burden of providing income for retirees has shifted from government funded programs and employers to the employees themselves. Therefore, to encourage individuals to get excited about saving, Uncle needed to provide an enticing incentive to defer gratification into future time periods. Not having to pay taxes seems like a pretty big incentive to me!

So what’s so great about a Roth 401k? Well, let me start by telling you the one caveat: you do not get a current tax deduction (actually a decrease in taxable income) like you would through a traditional salary deferral into a regular 401k. Therefore, for individuals in the highest tax brackets and depending on retirement assumptions, there is an argument that a traditional 401k may make more sense than a Roth 401k.

Now to the exciting part. As I mentioned above, for 2009 the most you can put into a Roth IRA is $5,000 ($6,000 if you are over 50) if your Adjusted Gross Income is below $166k MFJ ($105k Single). However, if your employer offers a Roth 401k option, you can put away $16,500 ($22,000 over 50) with NO income limits! Contributions are made with after-tax dollars and the assets in the plan aren’t taxed at retirement if they are held in the plan for at least 5 years and not withdrawn before age 59 and a half. At retirement or separation of employment, the funds can be rolled into a Roth IRA for further tax free growth (also an amazing estate planning tool!) and are not subject to Required Minimum Distributions. This plan is still ERISA protected and follows the same guidelines as a traditional 401k.

Considering the current state of the economy, our budget deficit now, and projected future government spending, I feel it is safe to assume that taxes are going to go up. If we feel strongly enough that taxes will be higher in the future than they are now, it is nearly a no-brainer to pay tax now on Roth 401k contributions and then reap the tax free benefits at retirement.

Also as you listen to the show I talk about the new Visa Black Card. I’ve been getting many questions from individuals receiving this ‘exclusive offer’ for this new luxury card. I wanted to make clear that this is NOT the American Express Centurion Black Card made famous by the super wealthy, celebrities, and James Bond.

I also share some amazing listener comments from last weeks show. It never ceases to amaze me how intelligent and insightful listeners to this show are. Keep the comments coming!



Most Recent Episodes

The Best and Worst Types of Life Insurance!

No matter how much you know about finance, you’ve definitely heard about life insurance: maybe from commercials pitching it as something to buy your baby, or a family member or friend that got into the industry. Is life insurance worth getting or something you should...

How to Recover From 4 HORRIBLE Financial Mistakes!

In our nearly four decades of combined experience managing money, we’ve seen some horrible financial mistakes - here are the four worst we’ve seen first-hand and what you can do to avoid making a similar mistake. In this episode, you’ll learn: The worst financial...

New Data: Active Investments Are Better Than Index Funds?

A new research paper is out that claims active funds from two large providers, Vanguard and Fidelity, beat their own index funds. Are active funds beating index funds? What’s going on here? Let’s find out! For more information, check out our free resources...

Why Americans Are Actually Broke! (2023 Edition)

Americans might be bad with money, but you don’t have to be. In this episode, we discuss the underlying reason why Americans are so bad with money and how you can do it better. In this episode, you’ll learn: Common financial pitfalls you should avoid Practical steps...

Build Wealth With the 3 Bucket Strategy! (By Age) 2023 Edition

We believe there are three distinct taxable buckets you have the option of investing in for retirement. We’ll talk about how to balance those buckets by age and show a case study by age that shows what your buckets may look like! In this episode, you’ll learn: The...

Debt Ceiling Crisis: World’s Financial System at Risk?

Should you be worried about the debt ceiling crisis? Although political leaders have so far been unable to come to an agreement, we'll tell you what history says will happen and what it means for your finances. For more information, check out our free resources...

Financial Advisors React to INSANE Money Advice on TikTok!

Is financial advice on TikTok all bad or is there some good advice out there? Check out our brand new TikTok react show where Brian and Bo give their honest reactions to trending financial advice. Enjoy the Show? Sign up for the Financial Order of Operation (FOO)...

How to Save Thousands of Dollars in Taxes in 2024

Tax season is over for most of us, but that doesn’t mean it’s time to stop thinking about your taxes! Planning out your tax strategy in advance can save you time and money on your taxes. In this Q&A, we’ll discuss the line items on your return to pay attention to...

Average 401(k) Balance by Age (2023 Edition)

Are you doing better than the average American at saving in your 401(k)? We'll talk about basics of a 401(k), including new limits, employer matches, and vesting schedules, how many millionaires are created by 401(k)s, and of course the average 401(k) balance by age....