Since January 1, 2006, employers have had a new retirement savings plan to offer their employees--the Roth 401k plan, which combines features of Roth IRAs and traditional 401k plans.
The plan, commonly referred to as a "Roth 401k," is a hybrid that combines features of Roth IRA and traditional 401k plans but differs in important aspects. Some of the differences and similarities are outlined below.
Employees who already have a regular 401k plan can participate in a Roth 401k if the employer offers it. However, as of April, 2009, the combined total contributions cannot exceed the Internal Revenue Service limit set for individual plans--that is, $16,500 (or $22,000 for employees aged 50 or over). An employee who participates in both plans can designate the amount to be applied to each plan. Once a decision is made, the participant cannot switch money among the plans. (Roth 401k participants who change employers can roll over the proceeds into a Roth IRA.)
If an employer provides a matching contribution to a Roth 401k, two accounts are set up for each participant. The first contains the employee’s after-tax contributions that will be distributed tax free. The second account contains the employer’s before-tax contributions and any investment growth; these funds are taxable when distributed.
The National Compensation Survey (NCS) publication "Employer Costs for Employee Compensation" presents employer costs data for various employee benefits. Currently, information is available for defined contribution retirement plans that includes data for traditional 401k plans. When the NCS encounters the new Roth 401k plans, they will be included as defined contribution plans in the NCS benefits incidence and provisions estimates.
Roth 401k plan
- Employee contributions are made with after-tax dollars.
Employees who already have a regular 401k plan can participate in a Roth 401k if the employer offers it. However, as of April, 2009, the combined total contributions cannot exceed the Internal Revenue Service limit set for individual plans--that is, $16,500 (or $22,000 for employees aged 50 or over). An employee who participates in both plans can designate the amount to be applied to each plan. Once a decision is made, the participant cannot switch money among the plans. (Roth 401k participants who change employers can roll over the proceeds into a Roth IRA.)
If an employer provides a matching contribution to a Roth 401k, two accounts are set up for each participant. The first contains the employee’s after-tax contributions that will be distributed tax free. The second account contains the employer’s before-tax contributions and any investment growth; these funds are taxable when distributed.
The National Compensation Survey (NCS) publication "Employer Costs for Employee Compensation" presents employer costs data for various employee benefits. Currently, information is available for defined contribution retirement plans that includes data for traditional 401k plans. When the NCS encounters the new Roth 401k plans, they will be included as defined contribution plans in the NCS benefits incidence and provisions estimates.
Roth 401k plan
- Employee contributions are made with after-tax dollars.
- Investment growth accumulates without any tax consequences.
- No income limitation to participate.
- Contribution limited to $16,500 in 2009 ($22,000 for employees 50 or over).
- Withdrawals of contributions and investment growth are not taxed provided recipient is at least age 59½ and the account is held for at least five years.
- Distributions must begin no later than age 70½. (This may change.)
Roth IRA
- Employee Contributions: Same as Roth 401k plan.
- Investment Growth: Same as Roth 401k plan.
- Income limits: married couples, $176,000, singles, $120,000 adjusted gross income.
- Contribution limited to $5,000 in 2009 ($6,000 for employees 50 or over).
- Withdrawals of contributions and investment: Same as Roth 401k plan.
- Distribution: No requirement to start taking distributions.
Traditional 401k
- Employee contributions are made with before-tax dollars.
- Investment growth is not subject to Federal and most State income taxes until funds are withdrawn.
- Same as Roth 401k plan. No income limitation to participate.
- Contribution Limit: Same as Roth 401k plan.
- Withdrawals of contributions and investment growth are subject to Federal and most State income taxes.
- Distributions: Same as Roth 401k plan.
Please visit our website at www.ifclegacy.com to have an independent fiduciary 401k advisor at Integrity Financial Corporation analyze and evaluate your company's 401k plan.
Source: John E. Buckley and 401khelpcenter.com
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