What is a Roth 401(k)? 6 benefits you might care about…

Why are more businesses offering Roth 401(k)s?

Simply put, more firms are recognizing their advantages – especially when it comes to the retirement planning of professionals, business owners and executives. Your company may offer a Roth 401k option that allows you to contribute after tax dollars that will potentially grow tax-free! If you are a business owner, you may have the flexibility to set up a Roth 401(k) for you and your employees.

Here are six reasons to consider a Roth 401k

1. Tax-free growth. Roth 401(k) assets grow without being taxed, as employee contributions are made with after-tax dollars. When you withdraw the money in retirement, you don’t pay taxes on it – provided you’ve owned the account for 5+ years and are 59½ or older when you start withdrawing. With this tax-free growth, a Roth 401(k) can help professionals, business owners and executives save more to get their retirement planning back on track.

2. No income limitations. Income limits prevent high-salaried individuals from having a Roth IRA. There are no income barriers preventing you from having a Roth 401(k).

3. No required withdrawals. You don’t have to withdraw money from a Roth 401(k) at age 70½, unlike with a traditional 401(k).

4. Higher contribution limits than a Roth IRA. How much can you put into a Roth IRA? In 2009, the answer is $5,000, $6,000 if you are 50 or older. How much can you put into a Roth 401(k)? Much more. For 2009, the contribution limit is $16,500 ($22,000 for those 50 or older).

5. A rollover option. If you leave a business where you have a Roth 401(k), you can roll the money over into a Roth IRA to maintain tax-free growth.1

6. An especially tax-smart move. Keep in mind, the federal government recently decided to spend more than a trillion dollars it didn’t have. Taxpayers will probably bear the cost in the future – particularly the highest-earning taxpayers. The government also needs to fund Social Security and Medicare in coming years. So who knows how high tomorrow’s taxes may be.

Roth 401k and Taxes

What would you rather pay – today’s taxes or tomorrow’s taxes? With all this financial pressure on the government, the consensus is that tax rates will go up. So as you save for retirement, isn’t it wise to have a Roth 401(k) that will let you pay taxes on your retirement savings today, rather than tomorrow?

Join the trend. A 2008 Grant Thornton survey of 186 companies sponsoring retirement plans found that 22% offered Roth 401(k)s, up from 12% in 2007 – and 19% more said they were considering Roth 401(k)s. Employer matches can be made to these accounts with pre-tax dollars.

Is your business offering the Roth 401(k)? It may be time. Owners, executives and professionals are among the highest-earning Americans – the Americans who have the greatest need for their retirement savings to grow tax-free.

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  1. Kevin at OutOfYourRut

    Bob, this is a timely post. From the experience of my spring tax prep sideline, Roths are taking off, especially among higher income taxpayers.

    The advantage that you can take the money out without incurring tax and a penalty on the principal, even in advance of retirement, is major. With IRA’s, 401ks and other retirement vehicles you’re locked in unless you want to take the big tax haircut. Roths give you greater control over the money in the short run, which could become a crucial option. They aren’t a pure retirement accounts (but can be of course).

    Right now more than a few people are finding they need to take the withdrawl option to cover lost cash flow.

    Another advantage is that you can make Roth contributions even if you have a retirement plan in place. This is especially important if you’re over 50 and are a little light on retirement provisions.

  2. Mark

    Check out http://thefinancebuff.com/2008/03/case-against-roth-401k.html

    He makes some very strong arguments against the Roth 401(k), even if you accept that the Congress will not diminish the tax-free status of Roths.

  3. Joel

    3. No required withdrawals. You don’t have to withdraw money from a Roth 401(k) at age 70½, unlike with a traditional 401(k).

    This is incorrect. Roth IRAs only allow this feature. Roth 401ks still have Required Minimum Distribution requirements.

  4. Brenda

    Joel is correct that you are subject to RMD at age 70 1/2 if your money remains in the Roth 401(k). This is in the tax code. There is a way to avoid that, however. A person simply needs to roll over the money into a Roth IRA and then the RMD requirement is removed. Since most employees leave their company before they reach this age, a rollover at the time of retirement is a great planning step.