Friday, November 03, 2006

Financial Planning 101: Pay retirement taxes now to save later

There's never a convenient time for taxes. But for twentysomethings who are saving for retirement, paying tax on contributions now, rather than later, may be the best alternative.

"Income tax rates are at historic lows," said Rick Meigs, president of, an online resource for both 401(k) administrators and participants. "What is the probability that in retirement you're going to have a lower tax bracket than you have today? It's not high."

One reason tax rates could go up: Once Baby Boomers begin to retire, the number of workers who pay taxes will start to drop, while demand for taxpayer-funded services such as Medicare will climb sharply.

To meet demand, taxes as a percentage of gross domestic product may have to rise by as much as one-third, "with more increases to follow," according to a speech that Federal Reserve Chairman Ben Bernanke made this month.

The bottom line: For anyone in a low tax bracket today, you may be better off investing through a Roth 401(k).

For more read here.

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