With the new tax laws in affect, we now have lower tax brackets and larger standard deductions. Contributions to your employer sponsored Roth 401(k) may now be more beneficial than your traditional 401(k).  There are several factors to consider:  

• Tax laws are not permanent and future rates can escalate.
• Tax free Roth assets can balance taxable distributions during retirement.
• Roth 401(k) income distributions do not trigger Social Security tax.
• Roth 401(k) distributions do not increase Medicare Part B and D premiums. 
• Roth IRAs do not have required minimum distributions (RMDs) at age 70 ½.
• Growth on Roth 401(k) assets are tax free upon withdrawal.
• Roth assets are estate settlement friendly.
• Roth assets can create tax-free income streams to heirs.

 Tax laws are not permanent and future rates can escalate

One contrast between a traditional 401(k) and a Roth 401(k) is when you pay taxes.  The traditional 401(k) is taxable later (tax deferred) and the Roth 401(k) is taxable now (future tax free).   Estimating the variation between current tax rates, and future tax rates will produce the most desired results.  Lower tax rates now, favors the Roth 401(k) by providing tax savings on the future taxed withdrawals.  Lower tax rates later,  favors the traditional 401(k) by deferring tax on current employee contributions.  The lower tax brackets that go into effect in 2018, as part of the tax reforms, may show that the Roth is the favorable choice.  Tax reforms assume that economic growth will far outweigh the effects of lost tax revenue.  If this projection does not materialize, and budget shortfalls ensue, higher tax rates may be the inevitable conclusion.   

 Tax free Roth assets can balance taxable distributions during retirement

The Roth 401(k) and the Traditional 401(k) have different tax rules.  Choice between the two investments can reduce retirement income tax.  Roth 401(k) income can delay Traditional IRA taxable distributions until 70 ½ .     

Roth 401(k) income distributions do not trigger social security tax

Traditional 401(k) dispersals are gross income on IRS Tax Form 1040.  Adjusted Gross Income (AGI) triggers social security tax and Medicare payment hikes.  The social security tax goes up with Provisional Income (PI).  Provisional income is:     

  PI  =  AGI  +  nontaxable interest (municipal bond interest)  +  50% of your social security  

 Social Security is an inclusive tax - the payment amount is included in the tax calculation.     

 Very important!     

Total income on the 1040 tax form is void of Roth 401(k) and life  insurance distributions. Provisional Income is unaffected!     

Roth 401(k) distributions do not increase Medicare Part B and D premiums

The Adjusted Gross Income (AGI) calculation determines Medicare premium amounts.  The Roth 401(k) causes no increase to AGI and the Medicare Part B or D premium.  Medicare's Income Related Monthly Adjustment Amount (IRMAA) increases with AGI until you are paying 80% of the cost.     

Roth IRAs do not have required minimum distributions (RMDs) at age 70½

Traditional 401(k)s and IRAs have Required Minimum Distributions (RMDs) beginning at age 70 ½ . The RMD is stepped up each year exhausting the account over the lifetime of the owner.  Gross income expands each year adding to PI.  A double tax is the result.  Income tax and social security tax.     

 Growth on Roth 401(k) assets are tax free upon withdrawal

Traditional 401(k)s include the tax deferred part of the contribution that Roth 401(k)s lack.  Added growth on borrowed money is powerful, but the growth is not tax free.  The entire Traditional 401(K) will be taxable upon withdrawal.  Imagine making $100,000 in cumulative contributions that grows to $300,000 at retirement.  The entire account is taxable at an unknown rate, set by a future government, at a prescribed schedule.  Roth 401(k) contributions are taxed at known rates, received tax free without a prescribed schedule. 

Roth assets are estate settlement friendly

Roth 401(k)s are tax free to heirs.  Traditional 401(k) conversions prepay the income tax, reducing the estate by the taxes paid.  Prepaying the taxes transforms an estate asset with an embedded tax, Traditional 401(k), to one tax free Roth 401(k).  Double taxation is possible if a Traditional 401(k) is included in a taxable estate. The double tax consists of the estate tax and the income tax .  

Roth assets create tax-free income streams to heirs

Roth conversion makes sense if the donor's tax bracket is higher than beneficiary's expected bracket.  The donor can convert Traditional 401(k) assets at lower rates, and the beneficiary can take tax-free withdrawals.  Another consideration, the beneficiary can stretch tax-free payments over their life expectancy.  Heirs must take RMDs calculated on their mortality.  The desired effect is tax free growth and income extended over their lifetime.