ACE Wealth Partners LLC is one of the leading firms in Denver providing 401(k) management for small businesses. We offer impeccable service regardless of whether it is a three-person law firm, or a five hundred-person engineering firm. Our 401(k)s offer both a pre-tax and Roth contribution option. Which is the right contribution type for you?
A pre-tax contribution to a 401(k) is deductible in the year it is made. This lowers your taxable income and provides an immediate tax benefit. A pre-tax contribution typically makes sense for an investor in a higher tax bracket or within a few years of retirement. When pre-tax accumulations are taken out as income in retirement, they are taxed at your ordinary income rate. The theory is that most people are in a lower tax bracket when they are retired then when they were working. Therefore, their income from the 401(k) will be subject to a lower tax bracket.
A Roth contribution to a 401(k) provides no tax advantages when it is made. However, when the Roth accumulation is taken out as income in retirement, the full amount of contributions and earnings are not subject to tax. A Roth contribution typically makes sense for a younger investor who is in a lower tax bracket and has more time for growth of the contributions.
Resources should be available to help you make decisions from the company that manages your 401(k), an accountant, or your investment professional. Regardless of the type of contribution, the most important step is to start participating in your employer’s 401(k) as soon as possible while contributing enough to take advantage of the full employer match.