Roth 401k for Small Business

I have recently opened my own pet boutique. Although I haven’t started drawing in many customers yet, I am sure that in the coming years I will be making a comfortable living from this business. Should I choose to set up a Roth 401k for my business instead of a traditional 401k plan? Elvia B. Allen, South Bend, IN 46625

Elvia, for a business like yours that is in a nascent stage but is sure to grow big in the years to come, a Roth 401k is definitely the better plan. This is because with the Roth you pay taxes now at the time of making contributions to the plan. That is, you contribute after tax dollars. In exchange you avoid paying tax at the time of withdrawing your funds. This is exactly the opposite of what happens with a traditional 401k. With this plan, you contribute pre-tax dollars and pay tax at withdrawal time.

If you believe that your business is likely to be generating more income in future, then you will probably fall in a higher tax bracket then than you do now. By making contributions to a Roth 401k you pay your current lower tax rates. At withdrawal time, you can avoid paying tax at the higher brackets that you may be in then. The net result of participating in a Roth program is that in total, less of your hard earned money will be going to theIRSin the form of taxes.

Look at a few DIY software packages to set up your Roth 401k. Some popular ones that offer several excellent features are listed on You will find that using such packages lets you save significantly on set up and administration costs too.

About Elliot Earl, Director, Pension Trade Association
Director, Pension Trade Association Founded in 1982, the Pension Trade Association [California Domestic Nonprofit Corporation #C1629080] is dedicated to helping workers save for their retirement through expanded coverage of 401k -type defined contribution pension plans.

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