The Roth 401(k) Plan…It’s Becoming a More Popular Retirement Plan

The Roth 401(k) plan is becoming a more popular retirement plan option offered by employers.  This has become the foundation for many people's retirement plan.  Unlike a traditional 401(k) plan where contributions are made pre-taxed, contributions to a Roth 401(k) plan are made after tax. The benefit, however, is that if the account is open five years and the taxpayer is over age 59½, then all of the distributions are income-tax free.

For 2010, the maximum contribution to a Roth 401(k) plan is $16,500.  For taxpayers over the age of 50, an additional $5,500 is allowed as a "catch up" contribution.  This amount can be put into a 401(k) plan, a Roth 401(k) plan or any combination of the two.

Why would participating in a Roth 401(k) plan make sense for you?

  • If you thought your income tax bracket was going to be higher in retirement.
  • Younger people will have many years of tax-free growth and can accumulate a significant amount of money.

There is a phase out for Roth IRA's based on your AGI.  In 2009 it is as follows:

  • Single:   $105,000–$120,000
  • Married Filing Joint:   $166,000–$176,000

What if your employer doesn't offer a Roth 401(k) plan?

Have a conversation with them and see if they would be willing to adopt this plan.  There may be some administrative costs, so not all employers will want to participate.

If your employer offers a match, first of all, be grateful.  The match, however, will need to be made to the 401(k) plan and not the Roth 401(k) plan.

Action Item:  Find out if your employer offers a Roth 401(k) plan.  If so, review the items above to determine if this retirement plan makes sense in your situation.

Thomas F. Scanlon, CPA, CFP®

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