Roth Savings Option - Participant Questions Answered
We get a lot of questions from state employees regarding the Roth contribution option. So in this DC Update, I’m going to answer some of the most commonly asked questions we receive about the Roth contribution option. The first question we have is, “How is the Roth contribution option different from pre-tax?” The biggest difference between the two options is when you pay taxes. Roth is referred to as the after-tax contribution option because your contribution goes into your account AFTER you pay taxes on it. For example, if you make a $100 contribution to your deferred comp account a $100 contribution will go into your deferred comp account, and income taxes will be withheld from your paycheck on that amount. When you separate from employment and are eligible* to make a withdrawal, the amount withdrawn will be free from both federal and state income taxes. With pre-tax, your $100 contribution would go into your deferred comp account and no income tax will be withheld on that amount. When you separate from employment and make a withdrawal from your account balance (which includes your contributions and investment growth), you would then pay taxes on the amount withdrawn. This participant asks, “What are the benefits of savings with Roth?” There are several benefits to saving with Roth, such as tax-free growth, tax-free withdrawals in retirement if you meet a few requirements, and no required minimum distributions (RMDs). Keep in mind, that while Roth may benefit some savers, it may not be the best option for everyone. For example, Roth may be great for those who believe they will be in a higher income tax bracket when they retire – like younger employees who are just starting out – but it may not be beneficial for those who are at the peak of their earning potential and career and expect to be in a lower income tax bracket in retirement. “Will my take home pay be LESS if I contribute with Roth versus pre-tax?” Assuming all other paycheck deductions remain the same, the answer is Yes. When you save with Roth, you are paying more taxes upfront and therefore less will be going into your pocket. This is one difference of saving with the Roth option and a reason some state of Missouri savers are hesitant to utilize it. The flipside is that you won’t pay taxes when you withdraw the money from your account as long as you meet the necessary requirements*. We have more frequently asked questions regarding the Roth contribution option on our website, www.modeferredcomp.org, under “How it Works”, so be sure to check it out. You can also schedule a one-on-one meeting with your local deferred comp financial education professional and they can help you decide if saving Roth or pre-tax is best for you.
