When Guild members join The Animation Guild 401(k) Plan, can choose to make traditional "pre-tax" contributions, Roth 401(k) after-tax contributions, or a combination of the two. Each offers a valuable tax advantage:
• Pre-tax contributions lower a participant's taxable income, so she or he avoids taxes today. But participants don’t avoid taxes forever. When anyone makes a withdrawal, they'll owe ordinary income taxes on contributions and any earnings. (The assumption is: taxes will be lower in retirement than during a participant's peak earning yours.)
• Roth 401(k) contributions don’t lower a participant's taxable income, so she or he pay taxes today. But they can make tax-free withdrawals of both contributions and any earnings provided they're at least age 59 1⁄2 and made the first Roth contributions at least five years earlier.
Understand that Roth 401(k) contributions are different from Roth IRA contributions. Roth 401(k) contributions are made within a company-sponsored plan. In contrast, Roth IRA contributions are made to an individual account outside of a 401(k) plan. The good news is that individuals may be able to do both.
The maximum amount that can be contributed in 2016 -- Roth, Traditional 401(k), or a combination of both -- is $18,000 ... or $24,000 for individuals fifty or more years of age.
401(k) Plan Trustees met last Monday. Right now there are 2600 participants, with an average account of $90,000. There are currently $232 million in assets in TAG's 401(k) Plan.
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2 comments:
Deluxe is rolling out a Roth option for their 401(k) plan, too. The Finance Buff has two articles of interest on this topic:
-- The Case Against Roth 401(k)
-- Roth 401(k) for People Who Contribute the Max
For my situation, traditional 401(k) contributions make the most sense. Those in different situations may prefer Roth 401(k) contributions.
My take is that, for most people in their peak earning years, the best bet is to get the tax break NOW. It's tough to predict where tax brackets will be thirty years hence, but most people will probably be earning less, and thus paying lower taxes.
For somebody starting out and earning LESS money, the Roth might make more sense. But of course, most people with smaller paychecks have less disposable income to tuck into a Roth 401(k).
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