The NEW Roth 401k Plan

Written By: Stuart Simpson

There’s a new retirement plan soon to be available. It’s called a Roth 401k. President Bush brought this about in his 2001 tax cuts. This is a combination of two retirement funds – a 401k and a Roth IRA. But what does it mean?

Your 401k plan is pretax money set aside to grow as an investment. Your employer takes pretax money out of your check and allows you to direct the funds usually into mutual funds. 401k’s have another advantage – since it’s pretax money you take out of your check, your net pay is lowered, reducing the amount of taxes you pay. When you retire, then you draw out of your 401k what little you need and pay the taxes on it. When you retire, your income stream is gone, and so is your tax bracket. As you draw out your money from your 401k, then you hopefully enter a relatively low tax bracket and pay little on the proceeds.

Enter the Roth IRA. A Roth IRA is funded by after tax dollars. Anything put into this account will never be taxed again. You can open up your own Roth IRA account anywhere – even at a bank. Since the money is after tax, its just like you cashed your paycheck and are going shopping. The good news is you are taxed once on the front end, and then later when you remove the money, you won’t owe the government any taxes.

When you combine the two, you should be able to invest into your 401k with after tax dollars, and as it grows, and you retire, when you remove the funds, they will not be taxed. 31% of employers who have 401k plans say they plan to add this option for their employees. The bad news – your employer doesn’t have to add this as option.

Why wouldn’t I just go open my own Roth IRA and direct the funds in a mutual fund? Good question. The real advantage to the average worker is that money is taken out of your check and you won’t see the money. Makes it easier to invest. You don’t see the money as it’s taken out before they deposit your check. The #1 rule is to put money into your 401k no matter what options they give you. This new Roth 401k will start January 1st, 2006.
About the Author

Stuart Simpson

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