What Is A Roth 401K?

The Roth 401k was introduced with the Economic Growth act of 2001 and employers were able to start offering these plans to employees as of the beginning of 2006. An employer is not required to offer the Roth 401k and preliminary estimates indicate around a third of companies who were eligible to offer it proposed to do so. Perhaps one reason that employers are not enthusiastically offering the new plan is that many employers are reluctant to educate their workers on the new plan. One thing you won't be allowed to do as an employee is to have both a traditional 401k as well as a Roth 401k.

In some ways, the rules and regulations of the Roth 401k will be similar to those of the traditional 401k although there are some key differences, which may influence whether you invest in the plan. The maximum amount employees are allowed to contribute remains the same in 2006 as for the traditional 401k. Once you have made contributions as an employee, you cannot then transfer that money from a Roth 401k to a regular 401k plan.

The biggest difference between the Roth 401k and the regular 401k is that a traditional 401k is funded with pretax contributions, whereas your investments in the Roth 401k are funded with after tax contributions. Tax expert Dlouhy explains that "contributions will be made with after tax dollars and whereas you won't get the benefit of an upfront tax deduction, any investments will continue to grow tax free". However, if your company matches contributions, that money will only go into a regular 401k account as it is pretax money.

Another key difference is that the Roth 401k could be a huge benefit to high earners (loosely defined as those earning $100,000 or more) who were not able to make contributions to the Roth IRA because of the maximum income restrictions. If you expect your tax rate to be the same - or higher - when you retire, Dlouhy says "You may be financially better off with the 401k, than the Roth 401".

"Rollovers from a Roth 401 account will work in much the same way as the traditional 401k" explains analyst Dlouhy "You can transfer your money to another Roth 401k account if that employer offers it, or into a traditional Roth IRA" And with a Roth 401k plan, withdrawals for retirement are not assessed income tax.

The Roth 401k is here to stay - or at least until 2010, which is when the provisions of the original act guarantee. And after that, hopefully it will be as popular and as effective as the original 401k, which has certainly stood the test of time.