« Now THAT'S a caffeine addiction | Main | You can sell anything on eBay »
June 23, 2005
The Roth 401(k) is coming - will your employer offer it?
Starting January 1, 2006, employers will be able to offer employees funding into a Roth 401(k). It will be similar to the current Roth IRA - you'll be able to put in after tax money and then withdraw it tax free at retirement. (With traditional 401(k)s and IRAs, you're not taxed on your contributions, with the trade-off of being taxed when you withdraw it at retirement).
You might not even be able to take advantage, though - as of late 2004, only one third of 198 companies that responded to a survey by an employee benefits consulting firm said that they were planning to offer the Roth 401(k).
If you're in a low tax bracket now and expect to be taxed at a higher rate in retirement, you'd be better off in a Roth 401(k) rather than a traditional 401(k) since you can pay the lower taxes on your money now and withdraw it tax-free later.
The new Roth 401(k) has some extra benefits over a Roth IRA. For one, you'll be able to contribute a whole lot more after-tax dollars into retirement plans, let the money grow tax-free, and not pay taxes on it when you take it out. The Roth IRA only lets you add $4,000 this year and $5,000 next year, but with the Roth 401(k), you'll be able to contribute $15,000 per year, or $20,000 per year if you're over age 50. Plus, there are no income limitations for the Roth 401(k) like those that exist for the Roth IRA (contributions are phased out on the Roth IRA starting at $95,000 for single and $150,000 for joint filers).
If you want a Roth 401(k) option, you have to talk to your employer. Employers may be concerned with the costs of the new plans and educating their employees. They will be more likely to add it if their employees want it and intend to participate.
For more details, check out this article at Bankrate.com.
Posted by brian at June 23, 2005 06:41 AM