Why you might want to consider the new PSD Roth 401(k).

 

Great news, PSD just added a Roth 401(k) option to your retirement savings plan.  Roth means that you pay taxes now, but all the future earnings grow tax free.  So, should you switch to the Roth version of the 401(k)?  Since we don’t know the future tax code, it is impossible to determine.  However, if you are in a very low tax bracket now (i.e. a new teacher), it probably makes sense to use the Roth 401(k).  Another reason you might want to switch to the Roth 401(k), is because of the pension that you’ll receive in retirement.  That’s the reason I’ll be making the switch.  Between my pension, my wife’s social security benefits, and our retirement savings, we will likely be in the same tax bracket that we’re in now.  In this case, it makes sense to split our traditional accounts and Roth accounts.  Half of my retirement savings will be pre-tax in the PSD 457 and the other half will be after tax in the Roth 401(k).  Having a mix of traditional and Roth, in retirement, gives you more flexibility, especially when it comes time for required minimum distributions (age 72).  Of course, if you are married, you’ll need to take your spouse’s income into account also.  If your spouse is in a very high paying career now, and you expect to make less in retirement, it probably makes sense to make all of your contributions in a traditional account.  Oh, one last benefit of the Roth is that your heirs won’t have to pay taxes on the distribution.

If you can’t decide, consider going 100% Roth in your early/low paying years and then switching to 50/50 in your later, higher paying years.  This way you hedge your bet against unknown, future tax code and should be able to keep yourself in the same tax bracket, pre-retirement and in retirement, even with a decent pension.  Currently, we invest our savings this way:

• Roth IRA (2 of these)
• Traditional 457 (2 of these)
• Traditional 401(a)
• Roth 401(k)
• Roth 403(b)
• HSA (Hopefully we will never pay taxes on contributions or earnings).

One last thing: On the PSD deduction form, you can write in the percentage of Roth and traditional that you want to contribute to your 401(k).  In other words, you could write in 50% Roth and 50% traditional.

Here’s a more complete explanation of Roth vs Traditional savings: https://www.bogleheads.org/wiki/Traditional_versus_Roth

Nothing presented is to be construed as investment advice. Investment advice can be secured from a vetted Certified Financial Planner (CFP®).When working with a CFP®, it is recommended that s/he sign a Fiduciary Pledge. More information, including questions to ask a planner and a downloadable Fiduciary Pledge, can be found here: https://403bwise.org/education/professional