The ROTH 401K Plan Explained
The new Roth 401(k) retirement plan is basically a traditional 401(k) that is not bound by income thresholds, and is supplemented with the Roth IRA benefit of tax-free growth and withdrawals. Roth 401(k) plans become effective January 1, 2006, and will allow you to contribute after-tax earnings into an employer 401(k). The contributions you make will grow tax-free, forever. When you make withdrawals from a Roth 401(k), you will owe no tax. None. This is for a limited time only. Roth 401(k) plans are scheduled to expire at the end of 2010. Therefore, after 2010, Roth contributions could remain in the plan, but no new Roth contributions could be made after that time. Congress could extend these provisions at some time in the future.
Employees will be able to contribute after-tax dollars to the Roth 401(k). The money will be held in a separate account from contributions to your regular 401(k). You decide what percentage of your retirement plan contributions go to either account. You'll be able to make the maximum contribution allowable under 401(k) rules. The 2006 401(k) contribution limits allow employees less than age 50 to sock away up to $15,000 - $20,000 for employee’s age 50 or older. For those who want to save after-tax money, this is a much quicker route than saving in the Roth IRA, which has contribution limits of $4,000 for those less than age 50 and $5,000 for those age 50 and above in 2006. If you have a Roth IRA, or plan to open one, you can still contribute the maximum allowable to that account in addition to your Roth 401(k) contributions. If your company provides a matching contribution, it will be pretax money and will go only into the regular 401(k) account. The Roth 401(k) is open to all employees who qualify for the regular 401(k).
This is very attractive to higher-paid employees who may be excluded from having a Roth IRA account because of its income limitations. Contributions are irrevocable. Once the money goes into the account, it falls under all of the IRS rules and penalties for 401(k) accounts; you can't change your mind and have it switched over to your regular 401(k). Money can be withdrawn tax and penalty free as long as you're at least age 59 1/2 and have held the account for at least five years. The Roth 401(k) has the same distribution requirements as the 401(k). You'll need to begin taking minimum distributions by the time you reach age 70 1/2. This contrasts with the Roth IRA, which has no distribution requirements. You can roll over your Roth 401(k) contributions to a Roth IRA when you retire or if your employment is terminated.
Note: Section 403(b) Plans are also eligible. Once the Roth 401(k) program ends, (for now it’s scheduled to end in 2010), you cannot add any more funds to this account; however, they can remain in the plan until distribution.
Employees will be able to contribute after-tax dollars to the Roth 401(k). The money will be held in a separate account from contributions to your regular 401(k). You decide what percentage of your retirement plan contributions go to either account. You'll be able to make the maximum contribution allowable under 401(k) rules. The 2006 401(k) contribution limits allow employees less than age 50 to sock away up to $15,000 - $20,000 for employee’s age 50 or older. For those who want to save after-tax money, this is a much quicker route than saving in the Roth IRA, which has contribution limits of $4,000 for those less than age 50 and $5,000 for those age 50 and above in 2006. If you have a Roth IRA, or plan to open one, you can still contribute the maximum allowable to that account in addition to your Roth 401(k) contributions. If your company provides a matching contribution, it will be pretax money and will go only into the regular 401(k) account. The Roth 401(k) is open to all employees who qualify for the regular 401(k).
This is very attractive to higher-paid employees who may be excluded from having a Roth IRA account because of its income limitations. Contributions are irrevocable. Once the money goes into the account, it falls under all of the IRS rules and penalties for 401(k) accounts; you can't change your mind and have it switched over to your regular 401(k). Money can be withdrawn tax and penalty free as long as you're at least age 59 1/2 and have held the account for at least five years. The Roth 401(k) has the same distribution requirements as the 401(k). You'll need to begin taking minimum distributions by the time you reach age 70 1/2. This contrasts with the Roth IRA, which has no distribution requirements. You can roll over your Roth 401(k) contributions to a Roth IRA when you retire or if your employment is terminated.
Note: Section 403(b) Plans are also eligible. Once the Roth 401(k) program ends, (for now it’s scheduled to end in 2010), you cannot add any more funds to this account; however, they can remain in the plan until distribution.