A Closer Look At The Roth 401(k)
Category: Retirement
Subcategory: 401K


A Closer Look At The Roth 401(k)
401(K) plan is an individual retirement plan. This is a unique retirement savings plan, which is a combination of many features of the traditional 401(K) and the Roth IRA. Whether it is suitable to an investor or not would depend purely on his individual viewpoint and financial status.
Contributions to the Roth 401(k) plan are from post tax earnings and therefore do not earn any tax benefits. However, after the investor crosses the 59.5 age mark, all qualified distributions and withdrawals, including any investment gain to the account are absolutely tax-free. Any amount taken after five years from the date of setting up the Roth IRA and having reached the age of 59.5, in the case of disability or using a withdrawal to fund the purchase of a first home or in the case of the deceased, the beneficiary qualifies for a ‘qualified distribution’.
There is no ceiling on the income level of the investor for eligibility to participate, unlike other plans. So anyone can invest, irrespective of his income. The limit on the contribution is capped. For the year 2006, investors below the age of fifty years were allowed to contribute upto $15000 and those above fifty years could contribute upto $20,000.
Under the new rules, an investor is free to contribute to Roth 401(K) or Traditional 401(K) or partly to both. However, the ceiling on the contribution amount remains the same in all cases.
The plan is an employer-sponsored investment savings account and gets funded by after tax money. It is very important to note is that it is not a stand-alone plan. It is mandatory for the employer to first offer a traditional 401(K) plan, in which contributions are from pre-tax earnings. An employee can participate only if it is offered under the employer's plan. There is no way for him to contribute individually. This is in contrast to Roth IRAs, where it is possible for any taxpayer to set up an account, without any involvement from the employer.
The Roth 401(K) plan has been authorized under section 402A [1] of the internal revenue service code. The enactment is a provision under the EGTRRA 2001 (Economic Growth and Tax Relief Reconciliation Act, 2001). The plan gives freedom to employers to amend their Traditional 401(K) document, to let their employees choose to benefit from an IRA type of tax treatment, either for some part or the entire contribution to their retirement plans.
If you find it worth your while to contribute to the Roth 401(K) retirement plan, you would be well advised to first check with your employer whether the Roth 401(K) has been added to any plan for which you fulfill the eligibility criteria. You should also check with any expert advisor to determine if the Roth 401(K) plan is suitable to your financial profile.