Roth 401k - The New Retirement Investment Strategy

Welcome to the Roth 401k Guide

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Welcome to the Roth 401k guide. Here you will find information regarding Roth 401k as a tax sheltered retirement investment vehicle.

Enacted first in 2001, effective January, 1st 2006, and made permanent in August of 2006, Roth 401k is a valuable addition to the list of retirement investment vehicles that American have available to them today.

Although the plan is not necessarily suitable for everyone, it is still imperative that everyone reassess their retirement strategy and portfolio to see if the Roth 401k will be beneficial.

This site was born out of the need for clear and concise translation of unnecessary complicated tax laws and language. To the right, you will find several links that answers most frequently asked questions as well as resources for further reading.

I hope you will find this site useful.

Roth 401k vs Roth IRA vs Traditional 401k

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	Roth 401k	Roth IRA	401k
Contributions	After-tax dollars	Pre-tax dollars	before-tax dollars
Income Limits	None	$160,000 for married, $110,000 for single.	None
Maximum Contribution	$15,000 in 2006 or $20,000 if 50 or older.	$4,000 in 2006 or $5,000 if 50 or older.	$15,000 in 2006 or $20,000 if 50 or older.
Taxes on withdrawals	None. Provided requirements are met.	None. Same requirements as Roth 401k. Can also withdraw in certain cases for a first time home purchase.	All withdrawals are subjected to Federal and most State income taxes.
Required Withdrawals	Must begin no later than age 70 1/2 unless still working.	No requirements while owner is still alive.	Same as Roth 401k.

How is a 5-taxable-year period of participation calculated?

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The 5-taxable-year period of participation begins on the first day of your taxable year that you made a Roth 401k contribution and it ends after 5 consecutive taxable years have passed.

Since my Roth 401k contributions are made after-tax, can I withdraw from my Roth 401k account at any time and without taxes?

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No. The restrictions that apply to a Roth 401k are the same as those that apply to a 401k. You may only begin to withdraw from your Roth 401k account without penalty under these circumstances:

You've had a Roth 401k account for 5 or more taxable years.
You are 59 1/2 or older.
The Roth 401k account holder is dead.
You are disabled.

If you meet these criteria, you may start withdrawing from the Roth 401k account without penalty and without taxes.

Can I make contributions to both 401k and Roth 401k plans?

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Yes, you can make contributions to both plans. However, the combined total cannot exceed $15,000 for 2006, $15,500 for 2007, and adjusted for cost of living thereafter.

If you are 50 or older, the limits are increased by an additional $5,000.

Are there income limits for Roth 401k?

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No, there are no income limits in determining if you are eligible to contribute to a Roth 401k plan.

Is the Roth 401k plan permanent?

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When it was originally passed, there was a sunset clause that caused the Roth 401k plan to expire in 2010. However, on August 17, 2006, President Bush signed the Pension Protection Act of 2006 making the plan permanent.

Is the Roth 401k some new type of plan?

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No, it is not a new plan. It is a new designation in your existing 401k plan that went into effect January of 2006. Is was passed into law in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). A 401k can choose to adopt this new designation that would allow you to designate some or all of your contributions as Roth 401k contributions.

Although commonly known as Roth 401k contributions, the IRS calls these designated Roth contributions. Regular 401k contributions are called traditional, pre-tax elective contributions (elective contributions are also referred to as elective deferrals)

The key difference between a traditional 401k account and a Roth 401k account

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What makes a Roth 401k different than 401k is that your contributions into the account are post-taxed instead of pre-taxed. This means you cannot use the contributions to lower your gross income. However, when you start to withdraw money from your Roth 401k account, it will not be taxed.

Example:

You are currently making $50,000 annually and contributing $5,000 a year to your company's 401k plan. Your taxable income is actually $45,000 ($50,000-$5,000) of which you may be able to take home $30,000.

Under the Roth 401k plan, your taxable income is $50,000. You take home $33,000 and contribute $5,000 of that into your Roth 401k account leaving you with $28,000.

But wait, you're now taking home less money now than under your traditional 401k plan. What happened?

You contributed post-taxed money into the Roth 401k plan instead of pre-taxed money. What you're giving up today, you'll get back when you retire and are able to start withdrawing from your Roth 401k account. The money you withdraw from your Roth 401k plan when you retire will not be taxed again whereas under the traditional 401k plan, it will be taxed as regular income.

Roth 401k is just another option in your toolbox for retirement saving. You must decide for yourself which plan is better for you.

What is a Roth 401k?

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A Roth 401k account is simply a 401k account with a Roth component. For most purposes, it is treated like a 401k account that you are likely to have with your employer.

Similar to your typical 401k account, contributions to a Roth 401k account fall under these restrictions:

You are limited to $15,000 in yearly contributions in 2006, $15,500 in 2007, and adjusted according to cost of living thereafter.
If you are 50 years of age or older, you may contribute an additional $5,000 per year. This is known as the "catch up" clause allowing older workers tax shelter additional savings for retirement purposes.
You must begin taking the "minimum required distribution" by age 70 1/2.