November 2014

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44 | www.cedmag.com | Construction Equipment Distribution | November 2014 A Closer Look In the last three decades, 401(k) plans have come a long way. They have become a tried-and-true way to help employees build retirement nest eggs. However, while a tradi- tional 401(k) option is good, adding a Roth 401(k) option could be even better. Thoroughly understanding each option and how they can work together will allow the plan sponsor to make the most informed decision on what to offer their employees. We know of a company that recently hired a new general manager, who was interested in rolling over his entire 401(k) balance into the new employer's plan. Upon receipt of the rollover paperwork and a check, the provider telephoned the employer. Unfortunately, the money was from a previous Roth 401(k) plan and the employer's current plan didn't accept Roth deposits or contributions. So, the employer had to tell their new general manager they are unable to accept the rollover based on their current plan design. Understanding the Differences Between Traditional and Roth A Roth 401(k) is a type of retirement savings plan that combines some of the features of a Roth IRA and a traditional 401(k) into a very advanta- geous hybrid. Similar to a traditional 401(k) plan, employees contribute a portion of their payroll earnings into a retirement plan. Here's how contributions and distributions differ: n Traditional 401(k) – Contribu- tions are tax deferred, meaning contributions are withheld pretax from the employees' paychecks and the entire amount (contributions plus any gains) is taxed upon distribution. n Roth 401(k) – Contributions are made after an employer with- holds taxes and the entire amount (contributions plus any gains) may be tax free upon distribution in some circumstances.* Six Reasons to Consider Roth Both traditional and Roth 401(k) plans earmark funds for retirement savings and accumulate with market gains. However, there are some key benefits to making a Roth option available: 1. Pay Now, Not Later – By paying taxes on contributions now instead of later, the participant is taking advantage of today's known federal tax rate. Paying now may be safer than waiting until later since tax rates may be higher the year the money is distributed. Take a 32-year-old employee who makes $24,000 a year. He falls into a relatively low tax bracket due to his annual income. It might make sense to utilize a Roth plan and pay tax on his contributions now, because if he waits until retirement age he will most likely be in a higher tax bracket. 2. Maximize Tax Free Growth – One of the most important benefits of Roth 401(k) is that it allows a partici- pant's contributions to grow tax free in some circumstances.* 3. Lower Modified Gross Income – Individuals who plan on drawing a Social Security benefit should be aware that a portion may be subject to federal income tax. In general, a higher Modified Adjusted Gross Income (MAGI) results in more of their Social Security benefits being taxed at a higher percentage. The good news is that qualified Roth 401(k) distributions do not count toward increasing the MAGI; however, traditional, pretax distributions do. Make an informed decision about whether to add this alternative to your benefits package. BY JERRY STANFORD AND TODD THOMPSON A Surprising on Retirement Plans: Roth 401(k) Twist

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