Wednesday, May 18, 2005
Beginning in January of 2006, employers will have the option to offer employees a Roth 401(k). That is, a 401(k) plan with the features and benefits of Roth IRAs.
Employees would have the option of contributing up to $15,000 per year ($20,000 for those over 50) on an after-tax basis. The kicker, like in a Roth IRA, is that all of your money could be taken out tax-free. For example, let's say you contribute $10,000 to a Roth 401(k) next year and never contribute another dime. We'll assume a 7% annual return and it stays invested until you retire in 30 years. Your account is now worth over $76,000 and you can take it all without paying a dime in income tax--you receive $66,000 that Uncle Sam never gets his mitts on.
In a traditional 401(k) plan, your contributions are not taxed as income when you earn it but it are taxed, along with all earnings, when you take it out. A $10,000 contribution could save you $2,800 (28% tax bracket) today, but, using 7% for 30 years like above, your $76,000 will all be taxed in retirement.
Too much of a good thing? Here are a couple of things to know. Most employers don't know about it and will not likely offer it to employees unless they are aware of an interest--talk to your employer. Also, this is part of a tax act that expires at the end of 2010, so unless Congress extends it, it's gone after five years.