Dallas, TX (September 3, 2008) – In 2006, the Roth 401(k) plan was introduced as an alternative to regular 401(k)s, in which contributions are made with after-tax dollars. One could argue that tax-deferred plans – regular 401(k)s and traditional IRAs – are more appealing than after-tax plans because retirees will be in a lower tax bracket after they retire; but that may not always be the case.
A recent study by the National Center for Policy Analysis compares each type of 401(k) plan. Due to the complexity of the tax system and government transfer programs, some households will fare better with one account than with the other. For instance:
- Due to the Saver's Credit, lower-income households will do better with a regular 401(k) plan since the pretax contribution that is matched by the government is larger than an after-tax Roth contribution. Once the credit phases out, the regular 401(k) looks less favorable.
- Those who receive an employer match to their regular 401(k)s will have an advantage as well, since the employer match is not available for Roth 401 (k) accounts.
However, in the event of a future tax increase and no employer matching contributions, the Roth 401(k) is preferable:
- For example, faced with a 30 percent income tax hike on their retirement income, a 60-year-old couple earning $100,000 a year and receiving noemployer match on regular 401(k) contributions have a larger increase in their living standard by contributing to a Roth 401(k) rather than a regular401(k).
For more information, click here for the "To Roth or Not?" Brief Analysis: http://www.ncpathinktank.org/sub/dpd/index.php?Article_ID=16977