Should you invest in a Roth account in your Lockheed 401k? A Roth 401k is an retirement account that allows you to contribute after-tax money to use for retirement. Because you are investing after-tax funds (these funds are taken from your check after deductions like taxes, health insurance, social security are taken out) you won’t get any tax deductions on money you add to the Roth account, but the benefits in retirement can be pretty substantial.

The taxation of withdrawals from a Roth account in retirement are probably the biggest advantage to these types of accounts. As long your withdrawal comes after you are 59.5 years old (and you’ve had the account open at least 5 years), any of the gains you withdraw from the account will be tax free. That’s a huge advantage, especially if you have been contributing to the Roth for a long period of time.

For example, let’s say you are 25 years old and invest $5,000 into a Roth account in your 401k. Using a conservative 6% growth estimate, that $5,000 would grow to around $50,000 by the time you are 65. So the only portion of that money you have ever been taxed on is the $5,000 you originally contributed. You have over $45,000 of growth in the account and you can draw it out tax free in retirement. That’s a pretty sweet deal.

How Should I Invest my Roth 401k Account?

Basically, you usually want to take the same approach you use with pre-tax dollars for your Roth money. Determine how much risk you are willing to take and also take into account how long it will be until you need to use the funds.

I have had clients that want to take additional risk (and possibly increase the potential gain) in their Roth 401k accounts because of the added tax benefit of not having to pay taxes on the gains in their Roth 401k.

Truth. The Roth 401k came around in 2006.

Another Way to Diversify

Diversify Diversify Diversify. You always hear that term used when talking about what types of investments you should have inside your investment account, but it’s also a good idea to diversify how your funds will be taxed when you retire.

Having a bucket of money in retirement that won’t get hit with taxes when you need the funds is a nice option to have and makes retirement income planning a little easier.

Other notes on the Roth IRA

Same Rules Apply to Early Withdrawals. Much like the pre-tax dollars you put into your 401k, you are going to pay a penalty if you take out the funds before you reach age 59.5. For more info on early withdrawals and possible exceptions, you can visit this LINK.

Rollovers. When you contribute to your company 401k and choose the Roth option, you can also roll those funds into a Roth IRA. Just make sure to roll pre-tax funds into a traditional IRA and Roth funds into the Roth IRA. It’s also a good idea to keep records of those transactions so you don’t get hit with any unnecessary taxes because a rollover was coded incorrectly.

Watch Out for the 5 Year Rule. There’s a quirk out there that only allows you the tax benefit of the Roth account if you’ve had the account open and contributing to it for 5 years. If you roll your Roth account over to a Roth IRA from your 401k, that 5 year clock will restart if it’s a brand new account. Something to think about if you plan on taking withdrawals from the account right after your retire or roll it over.

Employer Contributions Will Still be Pre-tax. Even if you switch 100% of your contributions to Roth 401k contributions, your employer’s matching contributions will still go into the pre-tax portion of your 401k.

The Roth 401k can be great options for investors looking for tax-free income in retirement. As with any investment plan, it’s a good idea to talk with a financial advisor and tax professional to determine if it’s a good fit for your retirement plan.

Related:

5 Questions New Employees Might have about their Lockheed Martin 401k Plan