Taxing choices for your retirement account

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Q. My employer is changing our 401(k) plan to offer a Roth option. How can I decide where my contributions should go?
— Saver

A. More and more employers are offering Roth 401(k) options, and that’s good for savers.

In a traditional 401(k), your contribution is tax-deductible, the assets grow tax-deferred and you pay tax at ordinary income rates upon distribution. With a Roth 401(k), you make after-tax contributions and your retirement distributions are tax-free.

Whether you contribute to a 401(k) or Roth 401(k) should depend on several factors, such as your age and future earnings potential, said Altair Gobo, a certified financial planner with U.S. Financial Services in Fairfield.

Gobo said traditional thinking suggested getting a deduction on contributions during your working years — while theoretically you would be in a higher tax bracket — and taking your taxable distributions in your retirement years — when you would theoretically be in a lower tax bracket — would be advantageous.

He said this may or may not be true in all circumstances.

In most cases, Gobo said, he supports diversification.

“Take full advantage of any qualified plan available to you, especially when employee matching exists,” Gobo said. “Then, invest as much as you can with after-tax dollars so that those distributions will have less of a tax burden upon retirement.”

Gobo offered this: Imagine if you had three stacks of dollars — small, medium and large. In a traditional plan, you don’t pay tax on the small stack, which represents your contributions. The medium stack is your tax-deferred growth, and you pay tax on the large stack, which is your distributions.

“With a Roth 401(k) it is the reverse,” he said. “You pay tax on the small stack and get the large stack tax-free.”

You can learn more about Roth 401(k) plans here.

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This post was first published in July 2016. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.