In a Section 401(k) plan with a 100% match for the first 4%, what is the best contribution option for an employee making $40,000/year?

In a Section 401(k) plan with a 100% match for the first 4%, what is the best contribution option for an employee making $40,000/year?

• A. Contribute 4% as a deductible contribution.
• B. Contribute 4% as a Roth elective deferral.
• C. Contribute 4% as a Roth elective deferral and allocate the match to the Roth portion.
• D. Contribute 2% as a deductible contribution and 2% as a Roth elective deferral.

Answer: (C)

Choosing to contribute 4% as a Roth elective deferral and allocating the match to the Roth portion is the best option for maximizing the benefits of the 401(k) plan in this scenario. When contributions are made to a Roth account, they are taxed upfront, but any earnings and qualified withdrawals are tax-free in retirement. This is particularly advantageous for someone in the early or lower income stages, as they could potentially remain in a lower tax bracket upon withdrawal in retirement. By contributing the full 4% as a Roth deferral, the employee not only receives the immediate benefit of the match (which can enhance their overall retirement savings) but also ensures that at retirement, both their contributions and any associated matching contributions grow tax-free and can be withdrawn without tax consequences provided that the withdrawal rules are met. Additionally, contributing to a Roth account allows for greater flexibility in tax planning during retirement, as retirees can manage their taxable income by strategically withdrawing from either taxable or tax-free sources. This helps in mitigating taxes and maximizing spending in retirement. The other options may not provide the optimal combination of immediate gains from the employer match and long-term tax benefits. Contributing only partially to the Roth or opting for a blend of deductible and Roth contributions diminishes the potential for

Choosing to contribute 4% as a Roth elective deferral and allocating the match to the Roth portion is the best option for maximizing the benefits of the 401(k) plan in this scenario. When contributions are made to a Roth account, they are taxed upfront, but any earnings and qualified withdrawals are tax-free in retirement. This is particularly advantageous for someone in the early or lower income stages, as they could potentially remain in a lower tax bracket upon withdrawal in retirement.

By contributing the full 4% as a Roth deferral, the employee not only receives the immediate benefit of the match (which can enhance their overall retirement savings) but also ensures that at retirement, both their contributions and any associated matching contributions grow tax-free and can be withdrawn without tax consequences provided that the withdrawal rules are met.

Additionally, contributing to a Roth account allows for greater flexibility in tax planning during retirement, as retirees can manage their taxable income by strategically withdrawing from either taxable or tax-free sources. This helps in mitigating taxes and maximizing spending in retirement.

The other options may not provide the optimal combination of immediate gains from the employer match and long-term tax benefits. Contributing only partially to the Roth or opting for a blend of deductible and Roth contributions diminishes the potential for