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Roth 401k ? New Retirement Savings Plan.

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?Roth 401k ? New Retirement Savings Plan.

Brand new employer sponsored retirement plan is a hybrid of a traditional 401k and a Roth IRA.

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 went into effect on January 1st, 2006, a hybrid of a traditional 401k and a traditional Roth IRA called the Roth 401k.

Yet another employer sponsored savings plan, the new Roth 401k works in almost the same way as a traditional 401k 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 401k is funded with “pre-tax” dollars and the Roth 401k plan uses “after-tax” dollars. However, with the Roth 401k, withdrawal of your money at retirement will be tax free like a Roth IRA. The traditional 401k 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 401k plan. In fact, a recent survey by employee benefits consulting firm Hewitt and Associates found that only 31 % of employers currently offering the traditional 401k plan are considering implementing the new Roth 401k.

Contribution limits for the retirement plans are: in 2005, $14,000 for a 401k and $4,000 for an IRA, whether Roth or traditional. In 2006, this amount will increase to $15,000 for both 401k and IRAs.

401k

When Should An Employee Choose A 401K Rollover And Why

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?When Should An Employee Choose A 401K Rollover And Why

An employee should select a 401k rollover if he wants to refrain from having to look after and manage multiple 401k accounts and also pay extra in terms of the account charges towards administration of all those accounts. In this way, the account owner can continue to achieve decades of tax-deferred compounding that his invested funds earn in a 401k account. A major advantage of a 401k-retirement plan is that the employee has an option to retain it throughout his career. When changing a job/employer, the investor can choose any of the four alternatives:

1.) Leave the funds in the old employer?s 401k plan ? An employee can choose to leave his funds in the old employer?s 401k plan by paying record keeping and other charges to the account administrator to manage the account. The current employment of an employee does not affect continuing the 401k-account with a previous employer. If the employee has switched jobs several times over, it can lead to multiple 401k accounts leading to complexity in managing them as well as incurring their separate management fee by the employee.

2.) Undertake a 401k rollover to the new employer?s 401k plan ? An employee can refrain from having to look after multiple 401k accounts by choosing to rollover to the new employer?s 401k plan. This becomes possible if the employee gets a new job offer before leaving his current employer. Choosing this option tends to simplify things for an employee. However, before going for a rollover, the account owner must check the investment options of the new 401k-plan into which he is rolling over his previous account. The employee can even choose to rollover into an IRA account.

3.) Undertake a 401k rollover into an Individual Retirement Account (IRA) ? Choosing to rollover a 401k account is considered the best alternative for those employees who are interested in building up a comfortable retirement fund as it allows an employee?s savings to continue compounding tax-deferred while providing total control at the same time over asset allocation. This is how a rollover is undertaken: The account owner orders a distribution of his current 401k plan assets (this is reported in the IRS Form 1099-R.) After receiving his assets, the account owner must put them into a new retirement plan within a span of sixty days; such a deposit must be reported in the IRS Form 5498. An account owner cannot undertake more than one 401k rollover within a span of twelve months.

4.) Withdraw the funds, pay a 10% penalty fee and the taxes on amount withdrawn ? If an employee decides to withdraw the proceeds, he has to pay a 10% penalty on a disincentive for undertaking a withdrawal. Moreover, the proceeds invite regular income tax rates. This makes the withdrawal process all the more expensive to the account owner. It is deliberately designed in such a manner to dissuade employees from using up their 401k funds before the age of retirement. In such a situation, the financial loss comes from the decades of tax-deferred compounding that the invested funds could have earned had the account owner not chosen to withdraw the proceeds.

Always consult a financial professional before making any decisions.

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401k Retirement Plans Explained

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?401k Retirement Plans Explained

401k retirement plans are special types of accounts, financed through pre-tax payroll deductions. The funds in your account are invested in various ways. Your funds can be invested through any number of stocks, mutual funds, and other ways, and it is not taxed on any capital gains or interest until the money is pulled out or withdrawn. Congress approved this retirement savings plan in 1981, and its name was rooted from the section of the Internal Revenue Code that contains it, which is obviously, section 401k. One great advantage of this retirement plan is that the tax treatment is complimentary. Moreover, capital gains, interest and dividends are not levied until they are pulled out or withdrawn.

In terms of its investment customization and flexibility, 401k retirement plans offer employees and workers an extensive array of options and preferences as to how their property and assets are invested through time. Moreover, many businesses and companies permit employees to obtain company stock for their 401k retirement plan at a cut rate. However, many pecuniary consultants and counselors are not in favor of holding a significant percentage of your 401k plan in the shares of your boss or manager.

So what are 401k plans? If you are like most people, you probably have questions about your 401k retirement plan. You may be wondering how a 401k actually takes place, precisely what a 401k retirement plan is, or how you can be capable of stimulating the diminishing balance in your 401k plan. So how does a 401k plan actually work? If your company offers a 401k retirement plan, you can agree to join. You can also have the selection option of choosing the amount of funds you wish to put in from an inventory of funds presented in the 401k plan. Your payment will routinely be deducted from your pay check before taxes.

Every worker can invest up to a defined proportion of his wage into a 401k plan. Your involvement, along with any coordinated contributions from your employer, are then endowed into your chosen funds. These funds will produce interest before being taxed, and can be withdrawn when you reach 60 years of age. At this point in time, you must pay the income tax on the withdrawn funds. Furthermore, there are methods and means wherein you can pull out your funds before age 60. However, these early withdrawals frequently call for a penalty in conjunction with the payment of taxes.

A 401k retirement plan is an employer-subsidized retirement plan, and it is categorized into two groups: defined benefit and defined contribution. With this defined benefit plan, the employer pledges to give a distinct sum to those who want to retire and those who meet specified eligibility standards and measures.

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A Closer Look At The Roth 401k

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?A Closer Look At The Roth 401k

Roth 401k is a good retirement savings option. Although it does not provide an up-front tax-deduction, the account eventually becomes tax-free, because the withdrawals taken at retirement are not subject to income tax.

This tax benefit can only be provided to persons who are at least 59.5 years old, or are disabled, and who have held the account for a minimum period of five years. Roth 401k provides an opportunity to save with a different kind of tax treatment. It is a good option for those who are just starting their careers, and expect their income to grow in the future.

Eligibility for Roth 401k:

Anyone whose employer offers Roth 401k is eligible for this investment option. If an employee leaves his/her job, the Roth 401k balance can be rolled over into a Roth IRA. One major benefit of enrolling in Roth 401k is that an account holder does not lose eligibility when the income becomes very high. There is no provision of helping a person open this account if his/her employer does not offer Roth 401k yet. Employers provide a form to their employees to state some, or all, of their 401k contributions that will go into their Roth 401k account.

Difference between 401k and Roth 401k:

401k makes available some tax relief in the year a person may have contributed into the account. However, a 401k-account holder is liable to pay taxes on his/her contribution, along with all the investment earnings, later.

A Roth 401k account holder does not get any tax benefit in the year of the contributions, but all the earnings in the account will be free of tax for as long as the account exists. Besides, a Roth 401k-account holder can roll his/her account to a Roth IRA. The Roth IRA account continues to grow with tax-free earnings for as long as it exists. However, Roth IRA is not available to taxpayers with an income above a certain level.

Advantages of Roth 401k:

Since tax rules allow a person to make it as large as a traditional account, the Roth 401k account is more valuable compared to it. Therefore, saving in a Roth 401k account can make a person much better off at retirement. Given below is a table showing the amount required in a traditional account to have the equivalent of $100 in a Roth Account.

TAX- BRACKETAMOUNT

10%$111.11
15%$117.65
25%$133.33
28%$138.89
33%$149.25
35%$153.85

If a person is in the 33% tax bracket, he/she will have to withdraw $149.25 from a traditional account in order to spend $100. This is because $49.25 is used to pay the tax on the distribution. Roth 401k provides more wealth at retirement, as the distribution from it is tax-free.

While many companies that already have the traditional 401k plans, wanted to implement Roth 401k plans, which have been effective from January 1,2006 according to the law, in reality only a few actually have done it, because of the extra expenses involved. These companies want to first observe the success of Roth 401k before actually undertaking the cost of the implementation.

Roth 401k is a good investment option to save tax-free earnings for retirement. People can take advantage of it to be able to have a secure retirement, which is free from monetary worries.

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