The Retirement Savings Move Tax Pros Love

This is a small part of the Bloomberg’s new. Take a look !

When it comes to saving for his own retirement, certified public accountant Barry Picker takes advantage of a tax strategy ignored by most Americans. Each year he stashes some of his retirement savings in a Roth 401(k), rather than putting all his savings into a traditional 401(k).

While that means he misses out on the immediate tax break that comes from contributing to a traditional 401(k), Picker has something else in mind — a less taxing retirement. By paying taxes now, he wonโ€™t have to worry about paying taxes when he withdraws money from his Roth 401(k) later. Money withdrawn from a traditional 401(k), of course, will be taxed as ordinary income.

ย The big question investors have to grapple with, of course, is why they would rather pay taxes now instead of later — especially when there is no way to know where tax rates will be in the future. โ€œItโ€™s a compromise,โ€ says Picker, who is also a certified financial planner. โ€œI am giving up some control over managing my tax bracket today for being able to manage it in retirement. Thatโ€™s going to be valuable to me later.โ€


Social Security and Medicare

While Picker is thinking about keeping his taxes down in retirement, a Roth 401(k) also provides more flexibility when it comes to managing income and some less obvious payoffs as well.ย A traditional 401(k) requires you to begin taking distributions in the year your turn age 70ยฝ (or if later, the year you retire) — and then you pay taxes on that income. With the Roth 401(k), there is no required minimum distribution (if you roll the Roth 401(k) into a Roth IRA). That means you can choose to leave your funds invested and reduce your gross income.

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