Roth 401k Only Available to a Few

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Only about one in three employers are expected to start Roth 401(k) plans in 2006. But, those who are self-employed, independent contractors, or business owners with no employees, don’t have to wait. They can establish a Solo 401k with the Roth feature and take advantage of that opportunity now.

Washington DC - New tax rules that went into effect in January 2006, allow a Roth feature to be added to 401(k) plans. But millions of Americans will not have access to a Roth 401(k) because, according to a Hewitt Associates survey, only about one in three employers are expected to start Roth 401(k) plans in 2006. Still, those who are self-employed, independent contractors, or business owners with no employees, can establish a Solo 401k with the Roth feature and take advantage of the Roth 401(k) opportunity now, says Daniel Lamaute, retirement plan specialist at Lamaute Capital, Inc. (InvestSafe.com).

With a 401(k) plan, participants reduce their taxes when part of their wages goes to their 401(k) account. The contributions and earnings from the account are not taxed as long as the funds remain in the 401(k). However, the money is taxed at the time of withdrawal. Withdrawals are required to begin at age 70 ½ under the Required Minimum Distribution rules.

By contrast, contributions to a Roth 401(k) are made with after-tax dollars. But no taxes are paid at the time of withdrawal on the funds (principal and earnings) in a Roth 401(k) account, provided certain requirements are met. So if taxes are higher in the future at least the money that’s in a Roth 401(k) account will not get hit. A Roth account also gives more control over the timing of distributions because one can transfer Roth 401(k) funds to a Roth IRA and avoid the Required Minimum Distributions that would normally kick in at age 70 ½.

The major differences between a Roth IRA and Roth 401(k) are that 1) with a Roth 401(k) one can contribute up to 4 times more as much as in a Roth IRA - $20,000 in year 2006 for the Roth 401(k) vs. just $5,000 for the Roth IRA, and 2) high income individuals can contribute to the Roth 401(k) but are prohibited to contribute to a Roth IRA.

Individuals with income from their own business (part-time or full time), and independent contractor with 1099 income, should create their Solo-Roth 401(k) as soon as possible. That’s because the opportunity to set up a Roth 401(k) plan expires in 5 years. Unless Congress changes the laws, no new Roth contributions can be made after 2010. But funds that are already in a Roth account can continue to grow tax-free.

The 401(k) with a Roth feature is a valuable tool for employees and small business owners. It allows them to tailor their investments to meet their individual retirement objectives. Individuals with their own business should ask their tax professional about this plan and how it may benefit them. Anyone can visit http://www.investsafe.com to request a free information kit on the Solo 401(k) that includes both a Roth feature and a loan feature.

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D Lamaute