TO ROTH OR NOT TO ROTH?
The PTS Diagnostics 401(k) Plan allows you make Roth 401(k) contributions to the plan out of your pay. Traditionally, 401(k) contributions have been made pre-tax, meaning your contribution is deducted from your pay prior to calculating your Federal and State taxes. But, the PTS plan offers you the option of Roth contributions which allow you to contribute to your 401(k) after Federal and State taxes have been withheld.
Since these contributions are put into the plan once you’ve paid tax on them, when you withdraw them in retirement, they come out income tax free (and so do the earnings that you’ve received on your Roth contributions).
One way to look at is that when you contribute pre-tax, you will be taxed on both your contribution and the earnings when you take the money out as a paycheck in retirement. With Roth, however, you pay tax on the contribution, but you end up paying zero tax on the earnings (because both Roth contributions and earnings are tax free when withdrawn). What most fail to consider is that if you’ve saved for a long time, by the time you near retirement the majority of your 401(k) account balance will be earnings and not contributions. This means that you’ll end up paying zero Federal and State tax on the majority of your account!
The recent passing of the SECURE Act, the popular ‘Stretch IRA provision’ was eliminated. This means that you’ll pay more in taxes on an inherited IRA than past generations did – yet another reason to consider Roth contributions to your 401(k).
The generous PTS match (you put in 5%, you receive 6.5% from PTS) is contributed to both pre-tax and Roth contributions, so you don’t lose out on any matching contributions by doing Roth contributions. Certainly, there are many individual aspects to consider when making this decision. Our benefits advisory team, Perspective Financial Group, is available to answer any questions or to help you consider your options. They can be reached at 317-468-9317 or email@example.com.