January 2, 2006
Check out the new Roth 401(k)
If you participate in a 401(k)
plan, you may now have a new investment option to consider. Starting this year, 401(k) plans may include a Roth account. Here
are the key features.
You’ll make your contributions to the 401(k) account with after-tax dollars, just as you
would to a Roth IRA.
Distributions from the account will be tax-free, provided you meet the age and five-year holding
period requirements.
In contrast, with a normal 401(k) plan you contribute pre-tax dollars but pay tax on distributions
at ordinary income rates.
If your employer makes matching contributions, they’ll go into a separate account
and will be taxable when you withdraw them.
You’ll be able to contribute up to $15,000 in 2006, much more
than to a Roth IRA. If you’re over age 50, you’re allowed an additional $5,000 catch-up contribution.
The
income limits that apply to a Roth IRA won’t apply to the Roth 401(k). That will allow higher-income earners to participate.
Not
all plans will offer the Roth option. It’s up to the plan provider and the employer to decide.
If you have the
option, will it be a wise investment choice? Is it worth paying tax now on your contributions in return for tax-free distributions
in retirement? Whether that’s a good deal depends on your age, current and future tax brackets, and a number of other
factors.
If we can help you make the right decision, please contact our office.
Seattle Bellevue Tax Accountants
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