Question

You are now a certified financial planner who has recently graduated from college. Your parents are helping you to get started in your new business. Since your parents own a midsize company, they decide that IF you can come up with a good retirement plan for the 275 employees that they employ, they will hire you as the financial planner for the business. They want to make sure that all the employees in the company have some medical benefits as well as income when they retire. Most of these people have worked for your parents since you were a little child and you call many of them "Aunt" or "Uncle”.

What are you going to suggest to your parents? Are 401K's the way to go? What about Roth IRA's? Perhaps some type of stock option?

Most of the employees (200) are making $65,000 a year right now and have been employed with the company for at least 15 years.

What are you going to suggest? What do you think makes the better plan for these loyal and hardworking employees?

Make sure you cite your references in APA format and response has to be 250 words.

Answer 1

A 401k is a qualified retirement plan that allows eligible employees of a company to save and invest for their own retirement on a tax deferred basis. Only an employer is allowed to sponsor a 401k for their employees. These contributions are deducted from your salary on a pre-tax basis.

A Roth IRA is a special retirement account that you fund with post-tax income (you can't deduct your contributions on your income taxes). Once you have done this, all future withdrawals that follow Roth IRA regulations are tax free.

An employee stock option (ESO) is a stock option granted to specified employees of a company. ESOs offer the options' holder the right to buy a certain amount of company shares at a predetermined price for a specific period of time.

Whether you invest in a Traditional 401k (before tax) or Roth 401k (after tax), you will still be taxed at your effective income tax rate either going in with the Roth 401k or going out at withdrawal with the Traditional 401k. So the big decision is are you planning to be making less or more money in the future when you want to start withdrawing from your 401k? No one knows what the tax rate will be in the future, but because you won’t want to use your 401k money until retirement, you might be in a much lower tax bracket when you actually do retire, but who knows?

This is why in my opinion a Roth 401k will make you richer than a Traditional 401k. It’s all about control – since you put the money in a Roth 401k after you’ve paid taxes on it, it can grow tax-free and gives you more flexibility because the gains aren’t taxed when you withdrawal.