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The Retirement Savings Move Tax Pros Love

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When it comes to saving for his own retirement, certified public accountant Barry Picker takes advantage of a tax strategy ignored by most Americans. Each year he stashes some of his retirement savings in a Roth 401(k), rather than putting all his savings into a traditional 401(k).

While that means he misses out on the immediate tax break that comes from contributing to a traditional 401(k), Picker has something else in mind — a less taxing retirement. By paying taxes now, he won’t have to worry about paying taxes when he withdraws money from his Roth 401(k) later. Money withdrawn from a traditional 401(k), of course, will be taxed as ordinary income.

 The big question investors have to grapple with, of course, is why they would rather pay taxes now instead of later — especially when there is no way to know where tax rates will be in the future. “It’s a compromise,” says Picker, who is also a certified financial planner. “I am giving up some control over managing my tax bracket today for being able to manage it in retirement. That’s going to be valuable to me later.”

 

Social Security and Medicare

While Picker is thinking about keeping his taxes down in retirement, a Roth 401(k) also provides more flexibility when it comes to managing income and some less obvious payoffs as well. A traditional 401(k) requires you to begin taking distributions in the year your turn age 70½ (or if later, the year you retire) — and then you pay taxes on that income. With the Roth 401(k), there is no required minimum distribution (if you roll the Roth 401(k) into a Roth IRA). That means you can choose to leave your funds invested and reduce your gross income.

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Font: http://www.bloomberg.com/news/2012-06-04/the-retirement-savings-move-tax-pros-love.html

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