FINANCIAL CORNER
Lily M. Hazelton, ChFC, CFP
吳美華

What is a Roth 401(k)?

Beginning in 2006, employers are allowed to offer a new option to 401(k) plan participants - the ability to make Roth 401(k) contributions. Employers, however, are not required to do so.

A Roth 401(k) is a traditional 401(k) plan that accepts Roth 401(k) contributions. Like the regular Roth IRA, Roth 401(k) contributions are made on an after-tax basis. Although there is no up-front tax benefit, if certain conditions are met, your Roth 401(k) contributions and all accumulated investment earnings on those contributions are free from federal income tax when distributions are made.

There is an overall cap on your combined 401(k) and Roth 401(k) contributions. In 2006, you can contribute up to $15,000 to a 401(k) plan. The cap is increased to $20,000 for those who are 50 or older. You may split your contribution any way you wish. For example, you may make $5,000 of Roth 401(k) contributions and $10,000 of pretax 401(k) contributions.

If you make contributions to another employer’s plans such as 401(k), 403(b), SIMPLE, or SAR-SEP, your total contributions are limited by the above-mentioned cap.

Should you make pretax 401(k) or after tax Roth 401(k) contributions? If it’s likely that you will be in a higher or similar tax bracket when you retire, Roth 401(k) contributions may make sense. However, if you think that you will be in a lower tax bracket when you retire, pretax 401(k) contributions might be a better choice.

Also, your participation in a Roth 401(k) plan has no impact on your ability to contribute to a Roth IRA.

The information contained herein is not intended as a substitute for direct financial or legal advice.