• Home
• Finance
• Do You Know If Your Portfolio Tax Efficient??

Do You Know If Your Portfolio Tax Efficient??

So there I was, skimming through Yahoo Finance, and I came across an article speaking about Roth 401(k)s and just how so many tax pros absolutely LOVE them. In the article, they were basically discussing how great they were because they provided tax-free income during retirement and they were surprised that more people don’t use them. Of course, I thought, they should have asked me.

Why Don’t More Make Use Of The Roth 401k?

I know why a lot more people don’t use them – they don’t receive the upfront tax deduction for their contribution like a normal 401(k).

For those of you that are a bit murky on the rules, they go like this:

–With a traditional 401(k), you receive a tax deduction today and you also pay tax whenever you withdraw the money later.

–Having a Roth 401(k),you receive no deduction today, but all distributions later are tax-free.

A large benefit of the Roth 401(k) is that since all retirement distributions are tax-free, they also are not part of the calculation to figure out how much of your Social Security is subject to taxation. People are often shocked to find out that when they take money out of their 401(k)s, it often triggers additional taxation on their Social Security income. So they end up paying a “double tax” on their distributions. Distributions from a Roth 401(k) aren’t part of the Social Security tax calculation (or from a Roth IRA either).

So Why Aren’t These Options Wildly Popular?

The reason being simple. What we often see is that the majority of people would rather take their benefit at the moment when they know they will be capable of getting it. They can be concerned that promised benefits down the road may never materialize. They worry that the Government will change the rules on them.

Obviously, when it comes to taxation, the Government has its hands tied on things like this. Probably the most they might have the ability to do is to alter the rules from a certain point going forward, and grandfather in someone who already has a plan.

What Should You Possibly Do?

So if your company offers a Roth option on your 401(k), you would be well served to take advantage of it. I can promise you that when you reach retirement, you’ll be happy you did.

Matt Golab

Matt is an Investment Advisor Representative and the Chief Advisor of Aaron Matthews Financial Resources headquartered in Elk Grove, CA.
Click right here to learn more about Matt Golab!

Related Posts to Do You Know If Your Portfolio Tax Efficient??