Basic Financial Planning for Newlyweds




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THE NEW ROTH 401(k) AND 403(b)


Your Initial Financial Plan:


Looking For a CPA, Lawyer or Financial Advisor who has worked with lots of other newlyweds and is familiar with the issues that affect you?  

Should you contribute to the new Roth 401(k)??

If you like tough decisions, you'll love the new Roth 401(k) or 403(b).  Your employer can begin to offer you this twist to these already popular retirement savings plans on January 1, 2006.

Employers who offer 401k or 403b plans aren't required to provide their staff access to a Roth version of their plans, so now's the time to ask your employer's benefits department  whether they have started the process of amending their plan documents.  Don't be surprised if your employer balks, however, since Roth 401k's are scheduled to sunset on December 31, 2010 - meaning you'll have only five years to contribute to this type account unless a future tax bill extends their shelf life. 

Wondering what's the difference between your traditional salary deferral plan and its Roth counterpart?  While contributions made to your current 401k or 403b plan reduce your taxable earnings, you'll be taxed on money withdrawn from these retirement savings accounts down the road. 

With a Roth account, you forego a tax savings today, but the money invested within the account grows tax-free - provided you're at least 59 1/2 and the account has been open for at least five years before any money is withdrawn.  Let's say your Roth 401k account is worth $50,000 when you retire. You can withdraw the full $50,000 from that account and not pay a dime in income taxes.

In the old days, tax planning was easy.  "Do what you can to save taxes today" was the motto of the times.  And the government, by having a habit of tinkering with the tax rules, gives credence to this motto.  Keep in mind that these Roth accounts contradict this philosophy since they force you to forgo a tax savings today.

If your employer provides you with the opportunity to contribute to a Roth 401k or 403b account, what should you do?  If you trust the government not to substantially change the Roth rules between now and when you retire, consider going with the Roth if:

  • You're relatively young and plan to keep the money invested for a long time.

  • You're in a low tax bracket today, or feel that tax rates will be higher in the future.

  • You've always wanted to contribute to a Roth IRA, but your income has consistently been too high for you to put money into one.

  • You want your heirs to keep as much of the money they inherit from you as possible, since they won't owe income taxes on distributions received from Roth accounts.  (However, the amount they inherit from you might be less since you've paid higher taxes in years you contributed to a Roth 401k.)

  • You don't rely on the tax savings realized on your current contributions to your 401k or 403b account to meet your household budget.

For 2006, you can elect to contribute a total of $15,000 into a 401k or 403b account through salary deferrals.  Anyone 50 or older by the end of the year can contribute an extra $5,000.  If your employer offers a Roth, you'll allocate your salary deferrals between your Roth and non-Roth accounts.  Even so, any matching contributions made by your employer go into a non-Roth account.

Amounts contributed to a Roth account at work don't limit the amount you can contribute into your own Roth IRA.  For 2006, you and your spouse can each contribute up to $4,000 ($5,000 if 50 or older) into a Roth IRA.  Eligibility phases out for single individuals earning between $95,000 and $110,000 and for married couples earning between $150,000 and $160,000.

Here are a few other rules about Roth 401k's.  Contributions made into a Roth account must be segregated from your non-Roth money.  Elections to contribute to a Roth are irrevocable, and money can't be transferred between Roth and non-Roth accounts.  If you change jobs, you'll roll the money from your Roth account into your new employer's Roth 401k, or into a Roth IRA.

There has been quite a bit written about these new retirement savings accounts.  As long as you take full advantage of the 401k or 403b plan provided by your employer, you've already made the right choice.




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