Pub. 2 2013 Issue 1

24 San Diego Dealer I ntroduced by Congress in 1998, and approved in 2006 for use in 401(k) plans, the Roth contribution allows an individual to con- tribute after-tax savings with tax-free 2 investment growth. This is a powerful tool for controlling your tax situation in your retirement years as well as many other tax planning needs. Not only does your 401(k) investment grow tax-free, but prior to turning age 70½, you may roll your Roth assets into a Roth IRA where they are not subject to the Required Minimum Distribution rules that apply to traditional IRA’s and 401(k) plans. In addition, you may pass your Roth assets onto your heirs tax-free. Also, if you are currently maximizing your pre-tax 401(k) savings, doing so as a Roth contribution allows you to save even more 3 . At an assumed 35% tax, your $17,500 Roth savings is equivalent to a $27,000 pre-tax contribution. In comparison, your investment would grow to the same amount, but by utilizing Roth your account balance would be non-taxable where your pre-tax account would be reduced by state and federal income taxes. TAX FREE ASSETS: TAX FREE INHERITANCE – THE ROTH 401(K) For younger employees, who are typically in the lowest income years of their careers, paying todays lower income tax bracket rates and preventing future taxation under potentially higher income tax bracket rates, due to government increases and/or expected higher income, is an extremely valuable tax advantage as well. The Roth option in a 401(k) plan is a feature that can benefit each and every participant. Jason Dwyer, QKA Qualified 401(k) Administrator Director, NADA Financial Services jdwyer@nada.org ww.nadart.org 1 IRS limit for 2013 2 Non taxed investment growth may be subject to taxation if funds are withdrawn early 3 If not utilizing a Safe Harbor 401(k) plan design, Roth contributions are still subject to annual plan compliance testing EVERYONE, INCLUDING OWNERS AND OTHER HIGH WAGE EARNERS, MAY SAVE MONEY IN THEIR ROTH 401(K) PLAN. To contribute the maximum to a Roth IRA, for married joint filers, you must have an Adjusted Gross Income below $178,000 1 . Unlike Roth IRA’s, there are no income limits restricting the ability to contribute Roth savings to a 401(k) plan. And, your level of savings in a 401(k) plan is much higher at $17,500 1 ($23,000 1 if age 50 or older) annually compared to $5,500 1 ($6,500 1 if age 50 or older) in an IRA. By Jason Dwyer, Director NADA Financial Services