Find Out If The New Roth 401(k) Is An Option For You

Ask your employer's benefits department if they offer the new Roth 401(k) that became effective January 1, 2006. This new version of the popular savings plans allows your funds to grow tax-free.

Woburn, MA (PRWEB) January 31, 2006

Employers who offer 401(k) plans can now offer their employees a Roth version of these plans as of January 1, 2006.

So, now's the time to ask your employer's benefits department whether the Roth 401(k) is available to you today. Don't be surprised if your employer hasn't bothered with the paperwork, however, since Roth 401(k) s are scheduled to sunset on December 31, 2010 - meaning they'll only be around for five years unless a future tax bill extends their shelf life.

A Traditional Salary Deferral Plan Versus A Roth

While contributions made to your current 401(k) reduce your taxable earnings, you will be taxed on money withdrawn from these retirement savings accounts eventually.

“With a Roth account, you forgo a tax savings today, but the money invested within the account grows tax-free - provided you're at least 59 1/2 and the account has been open for at least five years before any money is withdrawn,” said Andrew Schwartz, CPA, founder of the LawyerTaxes.com, an affiliation of CPAs throughout the country that specializes in the tax planning and preparation for professionals practicing law. “Let's say your Roth 401(k) account is worth $50,000 when you retire. You can withdraw the full $50,000 from that account and not pay a dime in income taxes.”

In the past, tax planning was easy. "Do what you can to save taxes today" was the motto of the times. The government, by always tinkering with the tax rules, gave credence to this philosophy. Keep in mind that these Roth accounts contradict this philosophy since they force you to forgo a tax savings today.

Should You Contribute To A Roth 401k Account?

If you trust the government not to substantially change the Roth rules between now and when you retire, consider going with the Roth if:

-You're relatively young and plan to keep the money invested for a long time.

-You're in a low tax bracket today, or feel that tax rates will be higher in the future.

-You've always wanted to contribute to a Roth IRA, but your income has consistently been too high for you to put money into one.

-You want your heirs to keep as much of the money they inherit from you as possible, since they won't owe income taxes on distributions received from Roth accounts. (However, the amount they inherit from you might be less since you've paid higher taxes in years you contributed to a Roth 401(k).)

-You don't rely on the tax savings realized on your current contributions to your 401(k) account to meet your household budget.

How Much You Can Contribute

For 2006, you can elect to contribute a total of $15,000 into your 401(k) account through salary deferrals. Anyone 50 or older by the end of the year can contribute an extra $5,000. If your employer offers a Roth, you'll allocate your salary deferrals between your Roth and non-Roth accounts. Even so, any matching contributions or additional profit sharing contributions made on your behalf by your employer go into a non-Roth account.

Amounts contributed to a Roth account at work don't limit the amount you can contribute into your own Roth IRA. For 2006, you and your spouse can each contribute up to $4,000 ($5,000 if 50 or older) into a Roth IRA. Eligibility phases out for single individuals earning between $95,000 and $110,000 and for married couples earning between $150,000 and $160,000.

More Roth 401(k) Rules

Contributions made into a Roth account must be segregated from your non-Roth money. Elections to contribute to a Roth are irrevocable, and money can't be transferred between Roth and non-Roth accounts. If you change jobs, you'll roll the money from your Roth account into your new employer's Roth 401(k), or into a Roth IRA.

“Don't worry too much about this decision. As long as you take full advantage of the 401(k) plan provided by your employer, you've already made the right choice,” summarized Andrew Schwartz.

Andrew D. Schwartz, CPA is the editor and a major contributor to http://www.LawyerTaxes.com, a website that provides income tax and financial planning information geared towards law professionals. Schwartz has provided financial planning advice in interviews with various media, including the Washington Post and Wall Street Journal. He is available for interviews.

Contacting one of the LawyerTaxes.com CPAs will help ensure that you minimize the taxes you pay on your professional and self-employed earnings.

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