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Thursday, January 12, 2006

401K: To Roth or not to Roth?

My wife is self-employed, and we already have a Self-employed 401K. This year, Self-employed Roth 401Ks will be available, and I'm wondering if we should invest in one, particularly since our combined income this year will likely be above the ceiling for Roth IRAs. Roth 401Ks are cool, particularly for the self-employed:

o You can put up to $15K in the Roth 401K. (We aren't old enough to worry about catch-up contributions; they'd be another $5K if we were). Like a Roth IRA, the money appreciates tax-free, and also like Roth IRAs and unlike traditional 401Ks, the contribution itself is after-tax.
o The "employer match" part - which is up to another $30K or so if you're self-employed - is still available, although it's still a "traditional" 401K for tax purposes.

Anyway, the question: should we do a Roth 401K and pay the extra 40% or so marginal taxes (effectively costing us about $6K in extra taxes this year on the $15K contribution), or should we stick with a traditional 401K? I don't have the answer yet, but I'm looking hard and will post later.

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