If you are looking forward to a retirement spent paying hefty tax bills, a traditional 401(k) plan may be your twisted ticket to happiness.
Once you turn age 70½, you are forced to start taking money out of your traditional 401(k) annually — the more polite terminology is "required minimum distribution" — and every penny you withdraw will be taxed as ordinary income.
The perverse reality is that the more you have socked away for retirement in traditional accounts, the bigger your RMD tax bills will be, even if you don't need the cash to cover living expenses. And those RMDs just might boost your taxable income to a level that triggers owing more tax on Social Security benefits and being hit with a higher Medicare premium.
If that's not your idea of retirement bliss, chances are pretty good there is a great tax-savings move right under your nose that you're mistakenly passing up.
Vanguard reports that nearly two-thirds of 401(k) plans it administers now have the option of saving in a Roth 401(k), rather than the standard traditional 401(k).
With a Roth 401(k) contributions are made with after-tax income. The payoff comes in retirement when you can either skip RMDs completely (more on this in a second) or take distributions without owing a penny in tax. Yet less than 15 percent of retirement savers with the ability to save in a Roth 401(k) are taking advantage of the Roth option.