Roth 401K Benefits

What benefit does a Roth 401K have over a traditional 401K? A Roth 401K combines the features of the traditional 401(k) with those of the Roth IRA. The Roth 401K is offered by employers like a regular 401K plan, but with a Roth IRA, your contributions are made with after-tax dollars.

Although you don’t get the tax deduction up front, meaning you pay the taxes on the money now, the account grows tax-free, and withdrawals taken during retirement aren’t subject to income tax. This can translate into tax savings as most people are in higher tax brackets as they get older. Also, you won’t pay taxes on the money provided you’re at least 59 1/2 and you’ve held the account for five years or more.

The Roth 401K concept was introduced with the Economic Growth and Tax Relief Reconciliation Act of 2001, which stipulated that employers could start offering these plans in 2006. So far, there is a relatively low amount of employers which offer the Roth 401K.

The Roth 401K will offer some advantages to high-income individuals who haven’t been able to contribute to a Roth IRA because of the income restrictions. The Roth IRA eligibility for 2008 phases out between $101,000 and $116,000 for single filers and $159,000 to $169,000 for those who are married and file jointly. There are no income stipulations for the Roth 401K.

Currently in 2008, the Roth 401K accounts are subject to the contribution limits of a regular 401K — $15,500 for 2008, or $20,500 for those 50 or older by the end of the year — allowing individuals to stock away thousands of dollars more in tax-free retirement income than they would through a Roth IRA. (In 2008, Roth IRA contributions are limited to $5,000 a year, or $6,000 for those 50 or older.)

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