|Donald Jay Korn|
As Roth 401(k) plans continue to spread, young workers increasingly are voting to go Roth. In the first quarter of 2013, 10% of all participants in
“The continued upswing of Roth usage is driven by younger investors,”
This is particularly interesting news for financial advisors with young, not-so-wealthy-yet clients, especially those who stand to inherit from high net worth parents. Using a Roth plan wouldn’t cost them much in income tax today – because they aren’t earning much – but has huge potential benefits as they age and vault into much higher tax brackets due to wealth transfer events. Younger investors also have time on their side: with 40 years until retirement, assets have plenty of time to grow and are distributed, tax-free, after age 59 1/2 (provided the account is at least five years old.
The findings were based on an analysis of two million eligible participants in a subset of retirement plans that
Data provided by
“The new rules for converting existing traditional 401(k) assets to after-tax Roth 401(k) assets may have heightened awareness of how Roth plans work,” Nordquist stated, “which could be playing a role in the trends we’re seeing.”
Under the tax law passed at the beginning of this year, employees can convert all or part of their traditional 401(k) balance to a Roth 401(k) at any time, as long as their employer offers both versions and the plan documents permit such conversions. Taxes are due on these conversions, but the ultimate payout can be tax-free, regardless of future income tax rates.
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