Roth 401(k)

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Roth 401(k)

A 401(k) in which a contributor makes post-tax contributions in exchange for tax-free withdrawals after retirement. Instituted in 2006, this investment vehicle involves a worker placing a portion of his/her post-tax income into a 401(k) account and allowing it to be invested. When the investor begins withdrawals, all contributions and income resulting from its investment are free from taxation. Withdrawals prior to the age of 59.5 are subject to excise taxes, but the investor must begin disbursements before the age of 70.5, unless he/she is still employed with the company offering the 401(k). Most employees are allowed to place up to $16,500 (as of 2009) into a 401(k), and some employers have matching contributions. As with traditional 401(k)s, a Roth 401(k) is an employee benefit, and a worker must have a sponsoring employer to take advantage of one. However, a self-employed person may also set up a 401(k) for himself/herself.

Roth 401(k).

The Roth 401(k), which was introduced in 2006, allows you to make after-tax contributions to your account in an employer sponsored plan.

Earnings may be withdrawn tax free, provided that you have left your job, are at least 59 1/2, and your account has been open five years or more.

Both the Roth 401(k) and the traditional 401(k) have the same contribution limits and distribution requirements. You can add no more than the annual federal limit each year, and you must begin taking minimum required distributions (MRD) by April 1 of the year following the year you reach age 70 1/2. You can postpone MRDs if you are still working.

You may not move assets between traditional and Roth 401(k) accounts, though you may be able to split your annual contribution between the two. If you leave your job or retire, you can roll Roth 401(k) assets into a Roth IRA, just as you can roll traditional 401(k) assets into a traditional IRA.

Most 401(k) plans, including the Roth, are self-directed, which means you must choose specific investments from among those offered through the plan.

References in periodicals archive ?
My philosophy is that the tax benefits of life insurance as an investment are only bested by a Roth IRA or Roth 401k. I also believe that, for a life contract to be efficient, it is essential to determine its purpose.
These increased contributions to IRAs to $5,000; 401ks to $15,000, added a Roth 401k, and a provision allowing for catch-up contributions for people over aged 50.
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Your Guide to the Roth IRA, Roth 401k and Roth 403b, by Kaye A.
Therefore, under the right circumstances, the Roth 401k plan may allow an investor to create additional wealth and constitute a more prudent retirement plan choice.
As in the traditional 401k versus Roth 401k decision, the choice between deductible contributions to a traditional IRA and nondeductible contributions to a Roth IRA, when available, is not always an easy choice.
That's the gist of the new Roth 401k that will become available in 2006, thanks to the Economic Growth & Tax Relief Act of 2001.
"If you anticipate a lot of taxable income in your retirement years, the Roth 401k makes sense," French said.
Brunk said the advantage of the Roth 401k over the traditional Roth IRA is eligibility.
"If someone is trying to maximize what they are putting in, putting the dollars into a Roth 401k helps you maximize it because those dollars are worth more because they are tax-free dollars," French said.
Roth 401k contribution limits top out at $15,000 in 2006, with a catch-up provision for those over 50 capped at an additional $5,000.
And that is what they get with the new Roth 401k: the ability to sock away money, be taxed on it earlier rather than later and at a higher income bracket.