Retirement and taxes

I work with 401(k) plans, so I have always been a strong believer in saving on a pre-tax basis. The premise is that most of us will pay lower taxes when we withdraw the money in retirement. Yet our recent first quarter 2013 Wells Fargo/ Gallup Investor and Retirement Optimism poll found that 71% of non-retirees today believe they will pay higher taxes in retirement than they do today. That turns the pre-tax paradigm on its head. But it doesn’t change the need to save for retirement. So if the poll results are foreshadowing the future, what does that mean for us? My guess is that many will turn to a Roth 401(K) and Roth IRAs instead. They will still give us the ability to save – and for many accumulate earnings tax-free- and build a retirement nest egg but put our contribution in as an after tax deposit.

If you have access to a Roth feature in your 401(k), you may want to consider contributing to that option. For younger workers, this seems especially appealing since their earnings have a longer runway to buildup. Some workers may decide to “diversify” their tax situation by contributing both Roth and traditional 401k contributions. This a great topic to discuss with your financial advisor!

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