ownyourfuture
Thinks s/he gets paid by the post
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- Jun 18, 2013
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My 401(k) & IRA’s are ‘conventional’ versions, but several friends/family have Roth versions. Today, while researching something else, I found this Q & A regarding a Roth 401(k)
Q: My company offers a Roth- 401(k) where I can contribute almost $20K per year. We live in Minnesota, so our state income tax rate is high also.
Would you recommend for me to contribute to this and pay the tax on that income now or take the tax break now and pay the tax down the road?
A: I like the Roth-401(k) option. Taxes are the key difference between a traditional 401(k) and a Roth-401(k). As you mention, contributions into the Roth-401(k) are made with after-tax dollars. The earnings on your investments are tax free at withdrawal in your retirement years. A wrinkle is that if there is an employer match it's made with pretax dollars into a segregated account. The match will be taxed at withdrawal.
Question(s) 1: The person who answers, states that the employer match $ will be taxed at withdrawal. Is the ‘match’ taxed by both the state & the fed ? Do all states tax the employer match ?
Later, I found this:
Roth IRAs are different from traditional IRAs. Contributions go into Roth IRAs after taxes, therefore any distributions are tax-free. However, Minnesota charges income taxes on earnings when withdrawn. Also, an early distribution penalty of 10 percent may apply. An account holder may take a tax-free distribution from a Roth IRA by meeting the five-year holding requirement & waiting until after age 59 1/2. Federal & state taxes do not apply to an early distribution that results from a beneficiary's death, disability or a first-time home purchase.
https://www.sapling.com/8775984/minnesota-early-withdrawal-retirement-plan
Question 2: Concerning the paragraph relating to Roth IRAs. In sentence 3, the author states that Minnesota charges income taxes on the earnings when withdrawn, but in sentence 5, states that the account holder may take a tax free distribution by meeting the 5 year holding requirement & waiting until after age 59.5 ?
I'm guessing, in Minnesota at least, even if be account holder meets the holding period & age requirements, they'll still have to pay Minnesota income taxes on the earnings ? If that's the case, a follow-up question would be, is this the same in every state ?
Q: My company offers a Roth- 401(k) where I can contribute almost $20K per year. We live in Minnesota, so our state income tax rate is high also.
Would you recommend for me to contribute to this and pay the tax on that income now or take the tax break now and pay the tax down the road?
A: I like the Roth-401(k) option. Taxes are the key difference between a traditional 401(k) and a Roth-401(k). As you mention, contributions into the Roth-401(k) are made with after-tax dollars. The earnings on your investments are tax free at withdrawal in your retirement years. A wrinkle is that if there is an employer match it's made with pretax dollars into a segregated account. The match will be taxed at withdrawal.
Question(s) 1: The person who answers, states that the employer match $ will be taxed at withdrawal. Is the ‘match’ taxed by both the state & the fed ? Do all states tax the employer match ?
Later, I found this:
Roth IRAs are different from traditional IRAs. Contributions go into Roth IRAs after taxes, therefore any distributions are tax-free. However, Minnesota charges income taxes on earnings when withdrawn. Also, an early distribution penalty of 10 percent may apply. An account holder may take a tax-free distribution from a Roth IRA by meeting the five-year holding requirement & waiting until after age 59 1/2. Federal & state taxes do not apply to an early distribution that results from a beneficiary's death, disability or a first-time home purchase.
https://www.sapling.com/8775984/minnesota-early-withdrawal-retirement-plan
Question 2: Concerning the paragraph relating to Roth IRAs. In sentence 3, the author states that Minnesota charges income taxes on the earnings when withdrawn, but in sentence 5, states that the account holder may take a tax free distribution by meeting the 5 year holding requirement & waiting until after age 59.5 ?
I'm guessing, in Minnesota at least, even if be account holder meets the holding period & age requirements, they'll still have to pay Minnesota income taxes on the earnings ? If that's the case, a follow-up question would be, is this the same in every state ?