Elective deferral contributions to a traditional retirement plan are contributed on a pre-tax basis and help lower your current taxable income. Roth elective deferral contributions, however, are much like a Roth IRA in that contributions are made on an after-tax basis. Money in the Roth deferral source and any earnings will be distributed tax-free if withdrawn after age 59½, death, disability, and at the end of the five-year taxable period during which the participant’s deferral is first deposited into the Roth account through their employer's retirement savings plan (a.k.a. the Five-Year Rule). A Roth 401(k) account (or similar plan such as a 403(b), 457(b), or other) can be rolled over to another plan that permits Roth contributions or to a Roth IRA. If rolled into a Roth IRA, the tax-free nature remains and the money is not subject to the minimum distribution requirement at age 72 as in the Roth 401(k).
Who Would Likely Benefit?
* People who believe taxes will be greater in the future
* Young investors who believe they will be in a higher tax bracket in the future
* Investors who do not qualify for the Roth IRA due to income limit
* Low income investors who are tax-exempt
* Investors who use Roth deferral as a planning tool in conjunction with traditional retirement plans
* Allows participants to hedge against risk of higher future tax rates
Who Would Likely Not Benefit?
* People certain that future tax rates will decrease
* People expecting to experience a significant drop in income upon retirement
* People with high temporary income
* People needing access to their funds within the first five years of deferrals
In summary, Roth retirement plan contributions have potential to allow individuals more flexibility in saving for retirement, whereby giving investors more control over the taxable alternatives. MCF recommends a cautious approach when weighing the pros and cons.
Unsure if your employer offers a Roth deferral feature? Contact your HR or MCF Advisors for assistance in reviewing your retirement plan highlights and alternatives such as a Roth IRA.
MCF Advisors, LLC (“MCF”) is an SEC-registered investment adviser. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by MCF), or any non-investment related content, made reference to directly or indirectly in this presentation will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized investment advice from MCF. To the extent that a reader has any questions regarding the applicability of any specific issue discussed herein to his/her/its individual situation, he/she/it is encouraged to consult with the professional advisor of his/her/its choosing. MCF is neither a law firm nor a certified public accounting firm and no portion of the presentation content should be construed as legal or accounting advice. A copy of MCF’s current written disclosure statement discussing our advisory services and fees is available upon request. If you are an MCF client, please remember to contact MCF in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing / evaluating / revising our previous recommendations.