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masikafinance

Tag: ROTH

  • Taxes and 401k

    Eliud Masika, MBA

    Taxes affect your 401k or 403b significantly. Whether you have Roth or traditional 401k, taxes still affect your investment but differently.

    Taxes affect Roth when you get paid. In other words, every time you get a check from your employer weekly, bi-weekly or monthly, taxes are taken right away before your money is invested. This action of taxes being taken away before the funds are invested ensures that by the time you retire, you will not pay any taxes as you have already paid. At retirement, you just withdraw money and no worries about taxes.

    Taxes also affect the traditional 401K/403b. Taxes are not taken out of your paychecks. This reduces your taxes now and therefore your taxable income is reduced. Your investment grows tax free. However, at retirement, you will pay taxes.

    Whether Roth or traditional 401k works for you, it depends on your financial planning. Roth is better for you if you expect your income to be higher at the retirement age. This is because higher income means higher tax bracket, and Roth is ideal for this because you will not pay taxes. For example, high skilled jobs like doctors, Roth is a better option.

    Traditional 401k is ideal for those that expect to be in a lower tax bracket as they are going to pay taxes which is ideal for low skilled jobs.

    Some people, mix Roth and traditional 401k at 50 percent each. This is brilliant because they reap reduced tax benefit from traditional and at the same time benefit from no taxes on the other 50 percent Roth.

  • 401K Roth vs 401K

    Eliud Masika, MBA

    For those who have invested in 401K, you have seen Roth 401k and wondered what the difference between Roth and regular traditional 401k is.

    The main difference lies on how they are taxed . 401K Roth is a post-tax and traditional 401k is pre-tax. Both offer different benefits depending on your financial situation. To decide which best suits you, a tax professional must evaluate your financial situation.

    Generally, traditional 401k suits individuals that expect to earn less at their retirement age and therefore fall in lower tax bracket. In this case, 401k pre-tax may serve you well. Plus, it lowers your taxes every year before retirement age.

    On the other hand, 401k post -tax, you pay taxes now and you do not receive the benefits of lower taxes, however at retirement you do not pay any tax when you withdraw your 401k funds. This suits those who expect their tax bracket to be higher at retirement.

    So basically, Roth 401k and 401k differ only on when tax is paid on withdrawals. To maximize tax benefits in your particular situation, consult your 401k plan administrator or financial advisor. Vast number of people invest in traditional 401k because it gives immediate tax relieve and most people are likely to make less income at retirement and do not have to worry on higher tax bracket.