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Web of Finance
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| Jun 04, 2002 5:29 pm |
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Pension Reform Act - Roth IRA or pre-tax 457/401(k) ? |
Adam J
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On May 8 of last month, the governor signed legislation to conform California law with the federal pension reform (effective 1/1/02).
Among other things, this legislation allows employees who have both 401(k) and 457 plan options to take advantage of higher contribution limits.
For the 2002 tax year, I can now contribute up to $11,000 into BOTH a 401(k) AND a 457 Plan, for a total annual contribution maximum of $22,000.
I find this very interesting and as there are no limits as there have been in the past. Also, in the past, one could not maximize both plans. I'm in the unique situation where my employer has both the 401(k) and 457. I'm currently maximizing my 401(k) with the full $11,000 - pre-taxed.
Now, I find out that I can also contribute up to $11,000 - pre-taxed - into the 457.
Here's my question:
Since 1998, I've also been maximizing contributions to my ROTH IRA. The IRA contribution limit for 2002 is $3,000.
Now that my 401(k) is maxed out for the year, where should the additional money go? Let's say I have $3,000 to invest.
Scenerio A:
If I invest the $3,000 into the ROTH IRA, this will be in "after-tax" dollars. However, when the funds are withdrawn during retirement, the income is tax-free.
Scenerio B:
If I invest the $3,000 into the 457 Plan, this will be in "pre-tax" dollars (the out-of-pocket cost will be about $1,890 since this is exempt from state and federal taxes). However, the funds are withdrawn during retirement, it's considered taxable income.
So, to invest the extra money into a ROTH IRA or the 457 Plan?
In summary, one who has both a 401(k) and 457 Plan can invest up to $25,000 in 2002.
(401(k) - $11,000, 457 Plan - $11,000, and Traditional or Roth IRA - $3,000)
Private Reply to Adam J (new win) |
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