What Is A Roth 401K Plan?
Many employers have a new savings plan to offer their employees: the Roth 401K plan. The Roth 401K plan combines the features of Roth IRA’S and traditional 401K plans.
If you already contribute to a 401K plan, you can still participate in a Roth 401K plan if it is offered by your employer. The combined total contributions can not exceed what the IRS (Internal Revenue Service) limits for individual plans. An employee that participates in both plans can designate the amount to go into each plan. Once the decision has been made you can not switch money among the plans.
Below are some other things you should know about Roth 401K plans:
- Employee contributions are made with after tax dollars.
- Investment growth accumulates without any tax consequences.
- There is no income limit to participate.
- Withdrawals of contributions and investment growth are NOT taxed provided you are at least 59 ½ and the account is held for at least 5 years.
- Distributions must begin no later than age 70 ½ (this is subject to change).
If your employer provides a matching contribution to a Roth 401K plan, two accounts are set up for each participant. The first account contains the employee’s after tax contributions that are distributed tax free. The second account contains the employee’s before tax contributions and any investment growth. These funds are taxable when distributed.
You should always take advantage any time your employer offers to match contributions to your Roth 401K plan. This is extra money you will have at retirement.