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Roth 401k Resources |
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Roth 401k Facts
Contributions and Withdrawals:
· Employees will be able to designate funds in their 401k plans as ROTH contributions. Contributions and returns will then grow tax free until retirement.
· Roth 401k contributions will be subject to the same rules as traditional Roth IRA accounts: To be eligible for the tax free status, all contributions must be in the account for at least five years and cannot be withdrawn before retirement.
· Regular employees above age 50 can contribute $15,000 to a Roth 401k plan.
· Firms like Fidelity Investments and Vanguard are expected to offer Roth 401k accounts through employer sponsorship.
· Participants age 50 or older are eligible for catch-up contributions of $5,000 per year for a total of $20,000 per year.
· These contribution limits apply to both types of 401k plans. Therefore, employees have to make a careful decision on how to split contributions between a Roth 401k and a regular 401k. The choice is mostly between different tax treatments.
· Roth 401k plans can be rolled over to Roth IRA plans. This allows account holders to avoid making minimum withdrawals at age 70˝. Traditional 401k accounts require such minimum withdrawals.
· Tax-free status of a Roth 401k is subject to a 5 year term after the first contribution. Even if you prefer the traditional 401k, it may be a good idea to make at least a minimal contribution to a Roth 401k. In case you later decided to switch to a Roth 401k, the 5 year requirement will be much shorter.
· Roth 401ks are after-tax accounts and therefore allow employees to stack away MORE funds relative to using a regular 401k. Maxing out the $15,000 contribution limit after tax equals roughly $21,400 pretax assuming a 30% marginal tax rate. Thus, the Roth 401k effectively increases the amount of money that can be saved for retirement. More here.
Opportunities:
· The greatest advantage of a Roth 401k is that money grows tax free with no taxation at the time of withdrawal.
· Roth 401k accounts allow employees to stack away MORE funds in real terms. More here.
· Roth 401k accounts are a great option for employees who believe that income taxes will rise in the future. Taxes are paid at today’s tax rate with the account being tax free in the future.
· Roth 401k accounts are beneficial for high-income employees who were previously unable to contribute to a Roth IRA. There are no income restrictions associated with Roth 401k accounts.
· What you see is what you get. Roth 401k contributions are after tax and grow tax free in the future. Your Roth 401k account balance is the actual amount you will have available at retirement.
· Employees who are unsure whether to contribute to a Roth 401k or to a traditional 401k may split contributions between both accounts. This allows for personal diversification of retirement funds in case tax rates will be higher in retirement.
Risks:
· The proposed Roth 401k rule is part of the Economic Growth and Taxation Relief Reconciliation Act. Under this law, the Roth 401k provision will sunset in 2010 unless extended by Congress. If Congress does not extend the Roth 401k provision, incremental contributions to a Roth 401k will not be possible.
· If taxes were to fall over the next 10-30 years, a Roth 401k plan participant’s effective tax rate could be lower in retirement. In this case a Roth 401k account would be an inferior choice relative to a traditional 401k. More here.
· Employers are not obligated to offer Roth 401k accounts. Some employers may decide against offering this new option to avoid the administrative burdens associated with offering two separate 401k plans.
Other Facts:
· Employer Matching Contributions are tax deductible for the employer and therefore have to be placed in a traditional 401k plan.
· According to a survey by employment benefits firm Hewitt Associates, 35% of companies are likely to have a Roth 401k option in place by 2006.
· Benefits experts are concerned that more 401k choices may actually confuse employees resulting in lower total 401k enrollments.
· “Roth” savings accounts, such as the Roth 401k and the Roth IRA, are named after Senator William V. Roth. Senator Roth was a Delaware Republican who introduced legislation to allow tax free individual retirement accounts.
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Roth 401k Facts
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