Sioux Falls, SD
You can thank the fiscal cliff deal for opening up a new option for you when it comes to paying taxes on your retirement savings.
The idea is to raise billions of dollars for the federal government by getting you to pay taxes on your retirement plan now, rather than when you withdraw the money. Financial planners say in most cases, it's a good idea.
"I think very few people even know it's out there," Rob Huber of First Financial said.
About half of companies offer a Roth 401(k) option, but fewer than five percent of employees take advantage of it. With the Roth, all taxes are paid up front. So, converting your traditional 401(k) plan to a Roth plan means you'd pay the taxes now at your current tax rate.
"We don't know what the tax rates are going to be in the future. We know what the tax rates are now. So it's an unknown," Huber said.
And taxes historically go up; so that rate in the future is likely to be higher than what you'd pay on the money now. But not everyone has a pile of cash to pay those taxes up front.
"If you can afford it do it; if you can't, don't. If you have money in a pool that is not taxed in the future, I would choose that all day long," Huber said.
But if you're going to be in a lower tax bracket when you retire, you probably won't want to make the conversion.
"If you're not going to make as much money; you get taxed a lower percentage on those first chunks of dollars. So, your first 10,000 gets taxed at like 10 percent and up there, 15, 25, 28 percent," Huber said.
Do check to see if your employer offers a Roth 401(k) and if so and you can't afford to convert now, allocate all new contributions to the Roth plan so you're not facing as large of a tax bill upon retirement.
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