Roth 401(k): a new way to grow money
Pretax or after-tax? That is the question many
employees will face starting Jan. 1, 2006, when the government allows
companies to offer a Roth 401(k).
The Roth 401(k) will give employees the
option of setting aside money from their paychecks that's already
been taxed and saving it in a retirement account where it can grow
tax-free forever. A Roth 403(b) will be available to 403(b) plan
If you have a regular 401(k)
or a regular Roth IRA, you'll still be able to contribute to both
of those accounts; the Roth 401(k) is simply another
The Roth 401(k) is similar to the Roth
IRA in that after-tax money is being saved and grows tax-free, but,
as its name implies, the new account will fall under 401(k)
rules. Those rules, as they pertain to the new account, are still
in the "proposed" stage. The IRS may tweak them in the
months to come, but here are some of the main features of how the
Roth 401(k), as it stands now, will work.
- 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 employees 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)
- The Roth 401(k)
is open to all employees who qualify for the regular 401(k).
This is a boon 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
- Money can be withdrawn tax-
and penalty-free as long as you're at least age 59½ 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 70½. 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