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Whether to determine pre-tax or Roth 401(k) contributions

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Whether you’re starting a new job or updating your retirement savings goals, you may need to choose between pre-tax or Roth 401(k) contributions. may be more complicated than you think.

A pre-tax 401(k) deposit provides an advance tax credit, but the funds are tax deferred. In contrast, Roth 401(k) contributions are made after tax, but future earnings are tax-free.

Most plans have both options.almost 88% of 401(k) plans offer a Roth account By 2021, it will be nearly double what it was 10 years ago, according to Plan Sponsor Council of Americasurveyed over 550 employers.

your Current and future tax brackets is part of the puzzle, but experts say there are other factors to consider.

“It’s a tough decision in broad terms because there are so many things involved in that decision,” said Ashton Lawrence, a certified financial planner and partner at Goldfinch Wealth Management in Greenville, South Carolina. .

Here’s how to decide what’s right for your 401(k):

Smart tax planning details:

See more tax planning news.

Compare current and future tax brackets

One big question to consider is whether your retirement tax rate will be high or low, experts say.

Generally speaking, pre-tax contributions are good for high-income earners because of the tax cuts up front, Lawrence said. However, if your tax rate is low, it may make sense to pay the tax now with a Roth deposit.

If you’re in the 22% or 24% or lower stratum, I think Roth’s contribution makes sense, assuming you’ll be in the higher stratum after retirement.

Lawrence Pong

Certified public accountant of Pon and Associates

Lawrence Pon, CFP and CPA of Pon & Associates in Redwood City, Calif., said Roth 401(k) contributions are typically aimed at young workers who expect to earn more later in their careers. said to be suitable for

“If you’re in the 22% or 24% or lower stratum, assuming you’re in the higher stratum after retirement, I think Ross’ contribution makes sense,” he said.

‘Taxes are on sale’ until 2025

It’s unclear how Congress will change tax policy, but here are some provisions of the Tax Cuts and Jobs Act of 2017: To be deprecated in 2026including lower tax brackets and higher standard deductions.

Experts say these expected changes could also affect pre-tax and loss contribution analysis.

“We’re in this low-tax sweet spot,” said Catherine Varega, CFP and founder of Boston’s Greenbee Advisory, referring to the three years before the tax bracket rises. “I say taxes are for sale.”

We are in this low tax sweet spot.

Catherine Valega

Founder of Greenbee Advisory

Roth’s contributions are “easy” for young low-income people, but the current tax environment makes these deposits more attractive to higher-income customers, she said.

“We have a client who can make $22,500 in three years,” says Valega. “It’s a pretty nice chunk of change that will be tax-free.”

plus, Recent changes from Secure 2.0 For some investors, contributing to Roth 401(k) has become more attractive, she said. The plan now provides a Roth employer match and Roth 401(k) no longer requires a minimum distribution. Of course, plans may vary depending on which functions your employer takes.

Many investors also consider “historic goals”

Goldfinch Wealth Management’s Lawrence said “legacy goals” are also a factor in deciding whether to pre-tax or Roth contributions. “Real estate planning is becoming a bigger part of what people actually think about,” he said.

Since the Secure Act of 2019, tax planning for inherited personal retirement accounts has become more complex. In the past, non-spousal beneficiaries could “stretch out” their withdrawals for the rest of their lives.but now they have to Use up your inherited IRA within 10 yearsThe so-called “10-year rule”.

According to Lawrence, withdrawal timelines will be “much more compact and may impact beneficiaries, especially if they are at peak income”.

However, a Roth IRA could be a “better estate planning tool” than traditional pre-tax accounts because non-spousal beneficiaries are not obligated to pay taxes on withdrawals, he said. rice field.

“Everyone has their own preferences,” Lawrence added.

https://www.cnbc.com/2023/02/11/how-to-decide-between-pre-tax-and-roth-401k-contributions.html Whether to determine pre-tax or Roth 401(k) contributions

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