Archive for the ‘Estate Planning’ Category

401k vs. Roth IRA, vs Traditional IRA — what should you do?

Friday, March 26th, 2010

Many of us face a dilemma:  Should I invest in a Roth IRA, my 401k plan, or a Traditional IRA or some combination?  Here are some simple rules of thumb:

If you employer matches your 401k contributions:

  1. Invest in your 401k up to the amount to get the maximum match
  2. Then invest in a Roth IRA if you are eligible
  3. Then invest in your 401k again (no match)

If you employer does not match

  1. Invest in a Roth IRA if you are eligible
  2. Invest in your 401k

The situation is more complex if you are not eligible to contribute to a Roth IRA  with many contingencies that are best handled on a case by case basis.  Also, if your employer has a high cost 401k plan you may actually be better off investing some of your funds outside of your 401k in a regular taxable account once you have invested enough to receive the maximum 401k match.

The reason why Roth IRA contributions are a better bet for most people vs. a regular 401k contribution include:

  1. Tax rates are likely to be higher than they are today in the future when you withdraw your 401k contributions.
  2. You will have Required Minimum Distributions from a 401k plan at age 70-1/2.
  3. Your heirs will required to take distributions from your 401k plan and pay taxes on them.  There are no required distributions from a Roth IRA and any distributions are tax free.

Obama Plans to Keep the Estate Tax

Monday, January 12th, 2009

According to the Wall Street Journal President Elect Obama plans to keep the estate tax vs. letting it expire in 2010 as the current legislation calls for.  He plans to keep the exemption at $3.5MM.

What does this mean for you?  If you die and your net worth is less than $3.5MM you will not have any estate taxes.  If you have over $3.5MM then your will pay a tax of about 45% of the amount over $3.5MM.  There are many exemptions and credits available so that even if your estate is over $3.5MM you may not have to pay tax on some or all of the amount above $3.5MM.

It is likely that this $3.5MM limit will be raised with inflation over time.  Should you already have an estate over the $3.5MM limit or it will be shortly, you should make sure your estate plan is up to date.