2009 Year in Review

To Roth or Not

Employer retirement plans such as 401(k)s and 403(b)s can now come in two flavors: traditional and Roth. If your employer gives you this choice, how will you decide to Roth or not?

“This choice is mainly about when you receive the tax benefit of contributing to a retirement plan: now or in the future,” explains Karen Chan, University of Illinois Extension Educator.

Traditional plans let you defer paying taxes on both your contributions and the earnings until you withdraw the money, thus the label of Tax-Deferred Plans. With Roth, you pay taxes now on the contribution, but all the growth will be tax-free.

“For some people, the choice is clear-cut,” says Chan. If you’re close to retirement and want to tap this money in less than five years, go with the traditional option. You won’t get the full benefit from a Roth plan, since you must wait until the account has been open at least five years – even if you’re already age 59½ – to avoid penalties on distributions and taxes on earnings.

“If your income is low and your deductions are high enough that you won’t owe any income tax, choose Roth,” recommends Karen Chan.

There are other factors to consider. For example, Illinois does not currently tax distributions from tax-deferred retirement plans, such as traditional 401(k) and 403(b) plans. That gives traditional plans an advantage, since your contributions to a Roth account would be taxed.

Roth 401(k)s and 403(b)s do not offer all of the benefits available with a Roth IRA. For employer plans, there are no special provisions for first-time homebuyers or higher education expenses and there are required minimum distributions beginning at age 70½. But when you leave your job or retire, you can roll your Roth employer money into a Roth IRA.

Weigh the advantages and disadvantages of traditional versus Roth for your specific situation. What if you don’t have the time or the interest – or just find it too confusing? You could hedge your bets by splitting your contribution, with some of your money going into the traditional plan and some into the Roth. (Any contributions from your employer must by law go into the traditional option.)

Don’t let the Roth decision make you procrastinate about signing up for your plan. The most important thing is to start contributing, especially if you get an employer match.

To learn more about retirement plans, visit the Save at Your Job section of our free, interactive website, Plan Well, Retire Well: Your How-to Guide.

by Dawn Zuidema, theCity1.com
March 9, 2009