WHAT IS RIGHT FOR ME?

“When you cease to make a contribution, you begin to die” – Eleanor Roosevelt

The last 12 months has definitely been very surreal. You may have been extremely excited to celebrate a New Year. If one of your resolutions is to take a deep dive into your finances, you might want to review how you are saving for retirement in your 401k plan. Inside your 401k account, your plan offers a 401k contribution option that allows you to make Traditional and/or Roth contributions. One of the most common questions we get is, “Which option is the best for me?” And the answer, well it depends.

DEFINE THE DIFFERENCE

The difference is very simple, it is about taxes and when you make the choice to pay them.

TRADITIONAL 401K CONTRIBUTIONS allow you to get a deduction on your taxes now and allow the money to grow tax-deferred. However, you will pay taxes on the funds when you take them out to fund your retirement.

ROTH 401K CONTRIBUTIONS are taxed in the current year and then allowed to grow and be distributed to fund your retirement tax-free. The tax-free option makes the Roth contribution very attractive but before you go and make all your contributions, here are a few other decision points to keep in mind.

QUESTIONS & ANSWERS

What does your CPA or Tax Advisor have to say?

Good tax counsel also involves helping you to pay the lowest amount of taxes over your lifetime, not just this calendar year. It never hurts to check with them to get their opinion on the best option for the
short and long term.

Would you prefer to pay taxes on $5,000 or $25,000?

Well, we would all be happy to pay taxes on the lower amount of income so let me rephrase the question. If you contribute the same amount of money this year, those funds will grow inside your 401k plan the same way. So if you contribute $5,000 in 2021 and it grew to $25,000, which would you rather pay taxes on now?

What if there is an unexpected hardship?

If you had an unforeseen disruption in your finances, taking money out of your 401k prior to age 59 ½ will be subject to a penalty. Early distribution penalties impact both contribution types. However, there may be some financial hardships that the IRS allows to avoid the 10% penalty. However, traditional contribution dollars withdrawn will add to the taxable income you have to pay taxes.

OUR RECOMMENDATION

IT’S ABOUT MODERATION

As with anything today, moderation makes the most sense. You may want to be weary of anything in excess and instead use both contribution sources. Ideally, you want your portfolio to have three equal buckets of money saved by the time you retire. The equal amount of Roth, Traditional, and Regular Taxable dollars gives you plenty of options to help minimize your long term future tax bills.

BOX FINANCIAL ADVISORS, LLC IS AN AFFILIATE COMPANY OF BOX INSURANCE, LLC.

This presentation is neither an offer to sell nor a solicitation of an offer to buy any security or investment.

Past performance is not indicative of future returns and the value of investment and the income derived from them can go down as well as up. Future returns are not guaranteed and a loss of principal may occur.

The material in this presentation is based on information from a variety of sources we consider reliable, but we do not represent that the information is accurate or complete. The material provided herein is for informational purposes only.

Opinions expressed are current opinions as of the date appearing in this material only and are subject to possible change.

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This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client account should be handled, as appropriate strategies depend upon each client’s specific circumstances and investment objectives.

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