Roth 401K Info

Thanks to Gary for providing his notes!

The Pension Protection Act of 2006, signed into law by President Bush on 8/17/06, makes the Roth 401(k) permanent, removing the 12/31/10 expiration date that previously was in force.
The Roth 401(k) was enacted in Economic Growth and Tax Relief Reconciliation Act of 2001.

• Combines features of the traditional 401(k) with those of the Roth IRA
• Offered by employers like a regular 401(k) plan, but as with a Roth IRA, contributions will be made with after-tax dollars.
• Will not get an upfront tax deduction, but the account will grow tax-free and withdrawals taken during retirement will not be subject to income tax, provided you're at least 59 1/2 and you've held the account for five years or more.
• One advantage is that there are no income stipulations for Roth 401(k)s.
• Another advantage is that they are subject to the contribution limits of regular 401(k)s, which allows for the saving of more tax-free retirement income than they would through a Roth IRA.
  
• Disadvantage: Bigger annual tax bill the year contributions are made.
  
• Disadvantage: Slightly smaller take home paycheck.
  
• One limitation: the limited contribution applies to both 401(k) plans. No new opportunity to save, but to save tax-free.
  
• Three options: Contribute to a Roth 401(k) and suffer a cut in take-home pay or stick with a traditional 401(k) and hope that in retirement, their tax rate will be lower than it is now. Or contribute to both Roth 401(k) and traditional 401(k).
  
• How much you contribute in a Roth 401(k) depends on the estimation of income taxes you think you will pay in retirement. If you expect your tax rate to be higher, go for the Roth 401(k). If you expect it to be lower, do not go for the Roth 401(k). However, it is hard to predict what the taxes will be in the future.
  
• Eligibility: Anyone whose employer offers it. However, the employer is not required to offer it. They might not because of costs of implementing the plan and educating the workforce. Ask your employer!!
  
• Employer match: Still made with pre-tax dollars and the match will accumulate in a separate account that will be taxed as ordinary income at withdrawal.
  
• Early withdrawal rules: Same requirements as traditional 401(k) but not set in stone.
  If you leave job, the Roth 401(k) can be rolled into a Roth IRA.
  Money in a Roth 401(k) cannot be moved to a traditional 401(k).
  
• Question: Which 401(k) option will allow them to amass a bigger nest egg over the long run?
  Note: According to an article, tax rates are at all-time lows and many experts believe they will rise in coming years.
  
• Recommendation: Contribute a percentage to both traditional and Roth 401(k)s. Ask your employer if they offer it!