By Pat Loeb
PHILADELPHIA (CBS) — If you’re saving for retirement in a 401K, you have a new option to consider thanks to the ‘fiscal cliff’ deal. Among the deal’s fine print item is an expansion of a 401K plan that lets you withold taxes on your contribution now, and collect the money tax-free later.
Most people view 401K’s as tax shelters. The money goes into your retirement account before taxes. So why would you want to pay taxes on it now? There are reasons, but there are also risks.
“So it doesn’t really apply to everybody,” says financial planner Cathy Seeber.
On the plus side, you’ll be paying 2013 tax rates on the income, so you may save yourself some money if tax rates go up later — after you retire.
On the other hand, if you’re 401K takes a hit, as many did in the recession, you’ve already paid taxes on the full amount invested. Seeber says she advises people who have the option to put a little in both kinds of 401K.
“Flexibility is what’s key,” she says.
But Seeber says, in 2013, with payroll taxes going up, most people are going to want the tax shelter that a traditional 401K provides.