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Should you consider the Roth provision in your 401(k)? “Big Al” Clopine, CPA suggests you look at your tax bracket to figure out if you should utilize a Roth 401(k). With this provision, there is no tax deduction right now, but in the future all income, principal and growth is 100% tax-free. If your taxable income is high ($200,000-$250,000), it may not make sense to utilize a Roth 401(k) since the tax deduction would be very valuable to you.

Transcription:

“Hi, I’m Alan Clopine, I’m Co-CEO and Chief Financial Officer at Pure Financial Advisors, and you’re watching Question of the Week. Today’s question is something we get all the time: I have a Roth option in my 401(k)–should I take advantage of it?

Let’s go back, first of all. Many of you have 401(k)s or 403(b)s from your company. It’s a retirement plan that the company allows you to withhold some of your pay and into your pension account. In a regular 401(k) or 403(b) you get a tax deduction today; the money goes into these accounts and it grows tax-deferred. All income, growth and principal is taxable on retirement.

A Roth 401(k) is the opposite. There is no tax deduction right now, but in the future all income, principal and growth is 100% tax-free, and tax-free income in retirement is a great thing to have to keep you out of the higher tax brackets.

Should you take advantage of that Roth provision? The answer is it depends upon your tax bracket. Go to line 43 on your tax return and figure out what your taxable income is. Look at the tax bracket schedule to figure out what tax bracket you’re in.

If you’re married and below $75,000 or single and below about $37,000, you’re in a low tax bracket: 15%. You probably want to do the Roth provision because the tax deduction is not as valuable to you. On the other hand, if your taxable income is $200,000 or $250,000, something like that, you’ll probably want to do the regular 401(k) because the tax deduction would be very valuable to you. Somewhere between there, it just depends–it depends on your own circumstance. You want to take a look at what your taxable income is now versus what it’s going to be in retirement to figure out what that tax rate will be. You can mix and match too. You can have some in the Roth side of the 401(k) and some in the regular side of the 401(k). Take a look at what your tax bracket is and that can help answer this question.

You have just watched Pure’s Question of the Week.”

Disclaimer: The tax brackets referred above are from 2015 and are subject to change.

About the Host

Alan Clopine

CEO & CFO

CPA, AIF®

Alan Clopine is the CEO & CFO of Pure Financial Advisors. He currently shares the CEO role with Michael Fenison, the original founder of the company. Alan is primarily responsible for the day-to-day activities of...