Weekend Reading: Myths About the Traditional and Roth 401(k)/IRA That Affect How People Use Them
This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
One of your biggest retirement assets will likely be a tax-advantaged retirement account. If you’re looking for the most efficient exit strategy for withdrawals while en route to retirement or ways to minimize the tax impact on these savings, it’s important to know how they function.READ THE ARTICLE
Fact vs. fiction: William K.S. Wang of U.C. Hastings College of Law debunks nine myths surrounding the traditional and Roth 401(k) and individual retirement accounts. Four featured here include.
📌 Traditional and Roth contributions are completely different: Both are equivalent with a constant flat tax. A contribution to the Roth rather than the traditional gives you “more bang for the buck”; however, if the marginal tax rate at distribution is lower than at traditional/Roth contribution, the Roth contribution may be inferior to the traditional.
📌 The amount in your traditional 401(k)/IRA statement is all yours: You share ownership with the government; thus, periodic gains and losses could be less than you think.
📌 The “tax” on a traditional 401(k)/IRA distribution makes you worse off: The distribution is a partial liquidation of the joint venture, and the “tax” on RMD does not harm you, but it is a partial redemption of your tax-exempt “Roth” within the traditional. You can reverse the effect of RMD by using the after-“tax” proceeds of the distribution to pay the “tax” on a Roth conversion.
📌 You may convert only an IRA, not a 401(k): You can convert a traditional 401(k) in certain situations, such as a past employer 401(k) or the current employer 401(k) after age 59 ½, with employer permission and using "inside" or "outside" funds. However, using "inside" funds before age 59 ½ typically results in a tax code penalty.
There’s a Roth inside of your Traditional! Recognition of this could be a mental breakthrough to assist in helping you make the best financial decisions for your future.