Five Reasons Why HCEs Should Choose the Roth 401(k)/403(b) - September 6, 2005

There are five reasons why the Roth 401(k) is the preferred choice of 401(k) options for highly compensated employees.  Four are listed below but you'll have to wait until September 15 to learn number five, the one that makes this a very easy decision for most high paid savers.

Five Reasons Why HCEs Should Choose the Roth 401(k)/403(b)

Reason #1:  Your future tax rate will be as high or higher than it is today. 

Commentary  An article published in the August 29, 2005 edition of the Wall Street Journal quoted me as stating: "It only makes sense that the government will increase tax rates."  I stand by this quoted sound bite; however, its context warrants further explanation.

I believe that most individuals who pay taxes at the highest federal tax rate of 35%, in the highest tax bracket, will pay the same or higher taxes in the future.  However, the statement was not intended to mean that these individuals would remain in the highest tax bracket; rather that even in a lower tax bracket, they would pay taxes at the same or a higher tax rate.  For example, if the three highest tax brackets in the future are 45%, 42% and 38% respectively, even if you are in the third highest bracket, your tax rate will be higher.

Learn more about tax rates versus tax brackets

Access Article by Kaja Whitehouse, Dow Jones Newswires

Reason #2:  Roth IRAs are not subject to required minimum distributions. 

Commentary  Forbes.com and the Philadelphia Inquirer ran the same article in which I was quoted:  "Also, the Roth may present a unique estate-planning benefit for wealthier people," said Milberg.  This was the subject of my June 13, 2005 article on the Roth 401(k), The Roth 401(k): "A Hidden Wealth-Transfer Treasure for High Income Taxpayers." and what motivated the reporter to contact me.

Reason # 3:  The Roth 401(k) is a limited time offer; it may not be available after the year 2010.

Commentary  Since this is law, most articles on this subject provide this information but they fail to highlight it as a reason to take advantage of this limited time opportunity.

Reason # 4:  The Roth 401(k) provides an opportunity to diversify future tax risk. 

Commentary  Prudent investing dictates that one should diversify investments in accounts or investment vehicles that are taxed differently (i.e., taxable, tax-deferred, tax-free).  I do not believe this reason has received the attention it deserves since the Roth 401(k) provides a very attractive alternative to tax-free investing as compared to traditional tax-free investments such as tax-free bonds.

Reason # 5:  Tune in on September 15.

Commentary  This reason has not been published to date.  All I can tell you now is that it seems too good to be true, but I'll provide proof that it is.

For more information, go to:

www.roth401kinfo.com or www.roth403binfo.com

For a Free Analyzer Demo Available Now, go to:

www.roth401kanalyzer.com or www.roth403banalyzer.com

© 2005 Milberg Consulting LLC  All Rights Reserved

The information provided is intended as a general resource, not as investment or retirement planning, or legal plan compliance advice or counsel.  If you consider any actions discussed in this update, we suggest that you consult a qualified planning, tax or ERISA professional.  Milberg Consulting LLC and Barry R. Milberg do not warrant and are not responsible for any errors and omissions from this update.  Any tax advice included in this written or electronic communication is not intended or written to be used, and it cannot be used, by the taxpayer for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.