Making the Best 401(k) Choice
If your employer automatically enrolled you in a 401(k) plan at the beginning of this year, it’s time to take stock of your holdings.
The type of investment your company has chosen may or may not be advantageous to you.
“If you are under age 50, generally, the Roth [401(k)] is going to be better for you. It is going to generate more spendable income in retirement than the traditional tax treatment,” said Stuart Ritter, vice president and certified financial planner at T. Rowe Price.
“If you’re over age 50, the Roth is likely still better unless you expect your tax bracket to drop significantly in retirement."
One advantage to putting your money into a Roth is that it has no income limits and, while after-tax money goes in, you can generally withdraw money tax-free at age 59 ½.
The maximum annual contribution to any 401(k)—whether it’s a regular one or a Roth—is $16,500 in 2011 and $22,000 if you’re over 50.
However, taxes aren’t the only consequences of your retirement accounts. Fees, which can run up to between 2 percent 4 percent of your 401(k) account balance, could erode your gains. The best plans charge fees of under 1 percent, according to Brightscope.com.
The main point of any retirement savings is, of course, to generate spendable income once you’re no longer working, noted Ritter, who added that it’s always best to check your plan, make sure you’re putting enough away and automate the contributions.