Do regular 401(k) and IRA accounts offer greater tax benefits than Roth 401(k)s and Roth IRAs? This is a tough question. Regular 401(k)s and IRAs save taxes in the short term; Roth accounts save taxes in the long term. Regular 401(k)s and IRAs are vulnerable to future income-tax hikes, but may benefit from a future switch to consumption taxation if the switch exempts withdrawals from income taxation. Roth accounts are exempt from future income-tax hikes, but are exposed to future consumption taxation. For any given assumption about future tax policy, assessing the relative merits of the two types of saving vehicles requires accurate calculations of taxes in each future year -- calculations that incorporate not just standard federal income-tax provisions, but also the Savers Credit (for the lower-income workers), the taxation of Social Security benefits, the Alternative Minimum Tax, and state income taxation. The analyses in this discussion use sophisticated methods to study the relative merits of regular and Roth retirement accounts. The course first discusses the rules and operations with respect to 401(k) Roth contribution programs and then explores the planning implications given different assumptions about future tax policy.
- Rules for Roth contribution programs in 401(k) plans, including the separate accounting rules, the rules for distributions from designated Roth accounts, and record-keeping rules
- Rollover rules for distributions from designated Roth accounts in 401(k) plans to Roth IRAs outside 401(k) plans
- Fundamental factors involved in the decision to contribute after-tax amounts to a designated Roth account rather than before-tax amounts to a traditional 401(k) account using scenarios based upon stylized households of varying income levels and ages as well as alternative future tax scenarios
- The results, conclusions, and planning implications of the analyses of the stylized households under the various future tax assumptions
- Describe, broadly, the rules for Roth contribution programs in 401(k) plans
- Explain the rollover rules for distributions from designated Roth accounts in 401(k) plans to Roth IRAs outside 401(k) plans
- Evaluate the fundamental factors involved in the decision to contribute after-tax amounts to a designated Roth account rather than before-tax amounts to a traditional 401(k) account using various future tax scenarios
All CPAs in public practice who consult with individual clients, and anyone who works in financial planning or advises clients regarding investments and retirement issues.