What is the Roth 401(k)?
The Roth 401k is a combination of the Roth IRA and the traditional 401k. It is a company-sponsored retirement plan, but it invests after-tax dollars to a retirement account. Then, the money withdrawn at retirement is untaxed. Whereas, the traditional 401k takes pre-tax dollars and invests it and withdrawals are taxed at retirement.
Who does it benefit?
It can benefit anyone who believes their tax bracket will be significantly higher when they retire rather than now. If your money is taxed now in a lower tax bracket, then you can withdrawal as much money as you want each year during retirement without worrying about a high tax bracket. it can also benefit people who think they may fluctuate their withdrawals during retirement. If your money is in a traditional 401k and you withdrawal $50,000 one year and $100,000 the next year, then your money will be taxed differenlty. However, with the money in the Roth 401k, you don’t have to worry about how much you take out each year, because it will never be taxed again.
Who does it not benefit?
It doesn’t benefit those who think their tax bracket won’t change from now until retirement. Having said that, if you’re 25 years old and you think your tax bracket isn’t going to change when you’re 65, you need to start thinking a little more positive! If you’re 55 and going to retire in 10 years, then it would be safer to think that your tax status won’t change significantly. Also, it won’t benefit lower-middle income families who qualify for the earned income tax credit. It could higher your taxable income and qualify you for less EITC, because the Roth 401k contributions can’t be deducted from your taxable income.
My company started offering the Roth 401k, but they do not offer a company match with it. Companies can still offer a match but it has to be with pretax dollars and held in a separate account. That money will still be taxed when withdrawn at retirement.
How much can I contribute?
It’s the same as the traditional 401k. You can put in $15,000 a year if under 50, and $20,000 a year if over 50.
Can I contribute to a Roth 401k and a traditional 401k?
Yes, you can have two separate accounts if you wish. This might be a smart thing to do if you are unsure about what kind of taxes will be taken out when you retire.
Your company may or may not offer the Roth 401k yet and if you are interested, ask your HR manager why they don’t have it yet. it’s definitely a viable option, and I believe it will be renewed in 2010 when it goes back up for evaluation by the government.