The Roth 401K Retirement Plan
Similar to the Roth IRA and the 401k retirement plans, the Roth 401k allows after-tax contributions. Tax deferrals are not permitted, however, the account grows with tax-free interest. Likewise, the withdrawals made during retirement are not subject to income tax as long as the account has been held for at least five years and is owned by a person who is at least 59 ½ years old. The idea of the Roth 401k was introduced along with the Economic Growth and Tax Relief Reconciliation Act of 2001 and thus employers were allowed to offer the plan starting from the 1st of January 2006. The Roth 401k plan started with the premise that it would only run until 2010 but since its creation, it has been decided that it should remain a permanent option for retirement planners. The Roth 401k works particularly well for those who are ineligible to contribute to other retirement plans due to restrictions based on their high income. There are no such income restrictions with the Roth 401k. The accounts are restricted to certain contribution limits just like the 401k plans. These are $15,500 for the year 2007 with an additional $5,000 for those who are fifty years old and above. This makes the Roth 401k more profitable than the Roth IRA. Although it is possible to hold both a Roth 401k and a 401k retirement plan, the contribution limits apply to the combination of the two plans rather than each alone. You are entitled to save equal amounts with either plan but it is the tax option that makes the difference.
Some people will prefer to use the 401k, deferring tax until withdrawal in the hope that future tax rates will be lower than at present. Others prefer to use the Roth 401k, allowing their contributions to be taxed now, essentially taking pay cuts now so that their future income will be slightly higher. This leaves the option of dividing the contribution between both plans and getting the benefits of both the 401k and the Roth 401k. People who are expecting their income to significantly increase, especially if it will break into a higher tax bracket should stick with the Roth 401k plan as they will play less in tax now than in the future. Roth 401k is available for anybody whose employer will offer it but bear in mind that they are not obliged to and may only use this plan if enough employees request it. |
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