Brand New Employer Sponsored Plan Is A Hybrid Of A Traditional 401(K) And A Roth Ira-January 1st, 2006 Is Start Date For New Roth 401(K) Retirement Savings Plan

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Beginning in January of 2006, a brand new retirement savings plan will be unveiled called the Roth 401(k). This new plan allows for "after-tax" contributions as opposed to "pre-tax" dollars with a traditional 401(k). Upon withdrawal at retirement, no tax is due, which is not the case with a 401(k), since the tax has been deferred and is due at retirement. Check with your employer to see if the Roth 401(k) will be implemented; a recent survey shows that 31% of employers will offer it.

Income tax rates have been cut, the marriage penalty done away with, and the "death tax" is also on a path to no more. All of this is a result of the Bush administration's Economic Growth and Tax Relief Reconciliation Act which was passed by a Republican congress in 2001. Another provision of that act goes into effect on January 1st, 2006, a hybrid of a traditional 401(k) and a traditional Roth IRA called the Roth 401(k).

Yet another employer sponsored savings plan, the new Roth 401(k) works in almost the same way as a traditional 401(k) plan. Workers invest a portion of their income into a fund along with contributions from their employer (if any). The difference is that the traditional 401(k) is funded with "pre-tax" dollars and the Roth 401(k) plan uses "after-tax" dollars. However, with the Roth 401(k), withdrawal of your money at retirement will be tax free like a Roth IRA. The traditional 401(k) plan defers the tax owed during your career until retirement.

Although it may sound like the best of both worlds, it is important to note that no employer is required to offer this new Roth 401(k) plan. In fact, a recent survey by employee benefits consulting firm Hewitt and Associates found that only 31 % of employers currently offering the traditional 401(k) plan are considering implementing the new Roth 401(k).

Employees may now want to begin inquiring whether their employer will be offering the new retirement plan in 2006. Contribution limits for the retirement plans are: in 2005, $14,000 for a 401(k) and $4,000 for an IRA, whether Roth or traditional. In 2006, this amount will increase to $15,000 for both 401(k) and IRAs.

For in depth answers to your retirement and investment questions visit - providing simple and easy to understand information about 401(k) plans and IRA accounts.


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Simon Fox
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