Yes, Roths are a great tool – even if you’re older

Twice every week, Simply Money’s Nathan Bachrach, Ed

Finke and Amy Wagner are answering your financial questions. If you, a friend, or someone in your family has a money issue or problem, send those questions to yourmoney@enquirer.com

Sharon from Lebanon:  My work offers a Roth 401(k). Should I be using that? I’m 55. 
 
Answer: So many people, like you, work hard to save, only to find out later the government is lying in wait to settle-up on the taxes owed in retirement.  A Roth 401(k) can be an excellent way to save now and stop the government from taking its share of your total retirement savings later. 

Remember, the money you’ve saved into a traditional 401(k) is not all yours.  The same is typically true with a traditional IRA.  In retirement, if you’re in the 25 percent income tax bracket, for example, and have $100,000 saved in a traditional 401(k), only $75,000 is yours.  Traditional 401(k) and IRA accounts are typically funded with pre-tax dollars, meaning you get a tax break now, but must pay ordinary income taxes later when you begin to withdraw the money.  Once you’re retired, the government will eventually want its tax dollars.  It will force you to begin taking withdrawals from your traditional 401(k) accounts or face penalties.  This starts at age 70½ and is called a required minimum distribution (RMD).  

A Roth 401(k), on the other hand, allows you to contribute money with after-tax dollars.  You pay the taxes now and these investments then grow tax-free. Think of this as “pre-paying” your taxes (or “locking in”) at today’s rates. When you reach 59½, money withdrawn is not subject to income tax.  The total contribution limit in 2017, for both a traditional and/or Roth 401(k), is $18,000.  Since you’re over 50, you can save an additional $6,000 as a catch-up contribution.

We talk a lot about a person’s investment mix and about diversifying savings into the correct mix of stocks, bonds and cash, to the benefit of that individual’s unique financial needs. Likewise, tax diversification should also be included in your financial plan.

The Simply Money Point is to consider yourself lucky.  Only 50 percent of employers offer both traditional and Roth 401(k) plans, and since you have this option, why not use both?  Just remember to contribute enough into your traditional 401(k) to get your employer’s match, if offered. This match is free money.  Then start to save into your Roth 401(k).  It’s a strategic tool that can help protect your hard-earned retirement money from the taxman.

Responses are for informational purposes only and individuals should consider whether any general recommendation in these responsesare suitable for their particular circumstances based on investment objectives, financialsituation and needs.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a Sycamore Township-based SEC registered investment advisor. Call (513) 469-7500 or email simplymoney@simplymoneyadvisors.com.