Lately many employees have been given a new savings choice: the Roth 401(k).
First offered in 2006, Roth 401(k) plans
are offered in 22 percent of workplace retirement plans, according
to Profit Sharing/401(k) Council of America.
More companies will likely follow suit, but the addition
of the Roth 401(k), "adds significant complexity that
has to be effectively explained to participants," says PSCA president
David Wray.
Contribution limits to a Roth 401(k) are the same as for regular 401(k) plans, but with
the Roth 401(k), your contributions are made with after-tax
earnings. That means you pay taxes upfront on your contributions.
Paying taxes now means you won't be subject to taxes
once you withdraw them, as long as the account has been open for
five years -- and you're 59½ years old.
Employers can contribute funds on your behalf, too.
However, these matching contributions are tax-deferred. This means
that only employee contributions to Roth 401(k) plans are tax-free
upon withdrawal.
Here's the lowdown on how they work.
 |
| Traditional vs. Roth 401(k) |
|
|
|
401(k) |
Roth 401(k) |
| Funding limits |
$15,500 per individual
$20,500 for those over 50 |
$15,500 per individual
$20,500 for those over 50 |
| Employer match |
Yes |
Yes |
| Contributions from |
Pretax earnings |
After-tax earnings
for employee contributions only |
| Earnings |
Grow tax-deferred until withdrawn |
Grow tax-free forever |
| Withdrawals |
Must start by age 70½ |
No time restriction if you roll account into a Roth IRA |
|
Bottom line: Roth 401(k)s are a smart
choice if you expect your tax bracket to go up in the future. They
also offer more time for your nest egg to grow because, even though
you have to start taking withdrawals at age 70½, it's easy to get
around the rule, says Ed Slott, author of "Your Complete Retirement
Planning Road Map."
"Simply roll the Roth 401(k) into a Roth IRA, and you can leave the money intact, plus you can keep putting money away if you continue to work beyond that," says Slott.
Can't decide which plan you prefer? Enroll in both as long as combined contributions don't exceed annual funding limits. |
