Roth 401(k) Plan

The Roth 401(k) plan is a combination of Roth IRAs and the traditional 401(k) plan. Commonly known as Roth 401(k) the plan also differs in some respect from the originals. The employer can offer the Roth 401(k) as well as the traditional plan 401(k) and the employee can contribute to both the plans but the total combined contributions to both plans are limited and should not exceed the limits set by the Internal Revenue Service for individual plans. For 2006 the limit set by the IRS is $ 15000 ($ 20,000 in case the employee is 50 years or older). However once you have decided to take part in both plans the decision will have to be final because you will not be able to switch money from one plan to another. But you have the option of choosing the amount that you want to contribute to each of your accounts. The Roth 401(k) provides you the roll over option to Roth IRA in case you move to another organisation. 


The employer is also entitled to provide a matching contribution to the Roth 401(k) plan and in case he does then two accounts have to be set up. One will contain the employee’s contribution which is deposited after deducting the relevant tax. The withdrawals from this account will be tax free. The second account will be the employer’s account where the deposit is made without any tax deduction. The withdrawals from this account are liable for tax deduction. These include the growth of investment over the period of time.


The some of the differences between the two plans Roth (k) and traditional 401(k) are: – a) the contributions by the employees to Roth 401(k), are made after deducting the taxes while in the traditional 401(k) plan the contributions are made pre-tax deductions   b) there is no further tax on the investment growth while growth in traditional 401 (k) plan is taxed only after withdrawal   c) the withdrawals of contributions and growth are tax free provided the account is held for at least 5 years and you are 59 1/2 years or older whereas in the traditional 401 (k) plan taxes are deducted by Federal and most State authorities on  withdrawals and investment growth.


You can make contributions to both Roth 401 (k) and the traditional pre-tax 401 (k) accounts in the same year but within the prescribed limits stated above. The catch-up contributions permitted in the Roth accounts for 50 years or older persons are also allowed in Roth 401 (k) plan.  


In case reporting or record keeping, you are not obliged to either report or keep a record as far as designated Roth contributions are concerned. However, if you are rolling over your account from Roth 401(k) to Roth IRA you are required to keep track of the account as per the instructions on form 8606.

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