Financial Planning
April 15, 2020
Picking A Retirement plan option: To Roth or Not?
Nothing in this world is certain except death and taxes. One of the important decisions that faces everyone who is saving for retirement is whether to pay taxes now or later.
By Lori Zager & Lisa James
The basic difference between Roth plans and traditional retirement plans is the tax treatment. Traditional IRAs and 401ks are funded with pretax dollars. Roth 401k plans and Roth IRA plans are funded with after tax dollars. Although both types of retirement accounts allow your retirement savings to grow without being taxed, distributions from traditional retirement plans are taxed at ordinary income rates. Qualified distributions (see attached table) from Roth retirement plans are tax free.  

There are two types of Roth retirement plans - a Roth 401k and a Roth IRA. 
Many can and do take advantage of company sponsored 401 K plans, but they are unaware that their companies offer Roth 401k plans. 
The Basics
  • Similarities between a Roth IRA and Roth 401k plan:
    • Funded with after tax contributions. 
    • Allow you to accumulate returns on your money tax free. 
    • Distribute money tax-free without penalty as long as you are 59 and a half and have held the account for at least 5 years.* 
  • The differences:
    • Roth 401k plans have no income limit.
    • Roth 401k plans require withdrawals at 72 or when you retire, whichever comes later.*
    • Roth IRAs allow penalty and tax-free withdrawals of your contributions at any time.
How do you decide between a Roth and traditional pre-tax IRA or 401k plan?
The government gets its money one way or another, either going in or coming out. The goal is to figure out when it is best to pay the taxes. If you are a high earner now and expect to pay lower taxes upon retirement, a traditional retirement plan may be best for you. If you are just getting started in your career, a Roth might be the preferred option. 

Is it possible to have both a 401k Plan (Roth or Traditional) and an IRA (Roth or Traditional)?
If you can afford to save more money for retirement, it is possible to have both types of retirement investments. Be aware there are income restrictions on opening a Roth IRA. You could, however, combine a Roth or traditional 401k plan with a traditional IRA if your income is too high to open a Roth IRA. The attached table is a useful guide.  

If you have limited funds, what retirement plan should you fund first?
Most companies offer matching contributions for their 401k plans (Roth and Traditional), but the match is placed in a Traditional (pretax) 401k.  We recommend that you max out your company match before making other retirement investments. 2X Wealth Group provides specific retirement planning advice based on your circumstances.   

How does the CARES Act affect my retirement savings?
As part of the recent $2 trillion stimulus bill, Congress allowed Americans who have been economically affected by the coronavirus to use their retirement accounts for relief. The changes include helping investors access funds from their retirement accounts and suspension of required minimum distributions in 2020. Please see our blog Congress Provides Improved Access to Cash in Retirement Accounts.

*  The CARES Act provides relaxed rules for 2020.

The information contained herein should not be considered advice that is specific to your personal circumstances, but a general guide when assessing and/or making decisions related to your finances. Nothing contained herein is intended to be a formal research report, or as a source of any specific investment recommendations and makes no implied or express recommendations concerning the manner in which any accounts should be handled. The information contained herein is not intended to be comprehensive, and there may be other factors and questions relevant to your own individual situation. Any opinions expressed in this material are only current opinions and while the information contained is believed to be reliable there is no representation that it is accurate or complete and it should not be relied upon as such. Investing involves risk, including loss of principal, and no assurance can be given that a specific investment objective will be achieved. You should consult a professional legal and tax advisor for any tax and estate planning advice prior to taking action.

2X Wealth Group is a team at Ingalls & Snyder, LLC., 1325 Avenue of the Americas, New York, NY 10019-6066  |  (212) 269-7757