The Roth 401k
Effective January 1, 2006, businesses looking for an employee
retirement plan had a new option: the Roth 401k. If the name sounds
familiar, that's because it is. The Roth 401k combines the Roth
IRA's power of tax-free withdrawals with the flexibility and
investment options of a traditional 401k plan.
Roth 401k Plan Advantages
The Roth 401k plan offers advantages to high-income individuals
who haven't been able to contribute to a Roth IRA because they make
too much money. (Roth IRA eligibility for 2010 phases out between
$105,000 and $120,000 for single filers and $167,000 to $177,000
for those who file jointly). A Roth 401k has no income
Another advantage of a Roth 401k plan is that they have the same
contribution limits of regular 401ks - $16,500 for 2010, or $22,000
for those 50 or older by the end of the year, allowing plan
participants to stock away thousands of dollars more in tax-free
retirement income than they would through funding a Roth IRA. (In
2009, contributions to a Roth IRA are limited to $5,000 a year, or
$6,000 for those 50 or older.)
In addition, participants can continue making contributions to
existing or new Roth IRA accounts while investing in a Roth 401k.
Keep in mind a Roth 401k isn't an opportunity to circumvent IRS
regulations and double your annual contributions. You're allowed to
maintain both traditional and Roth versions of a 401k, but you can
only contribute up to the annual limit for both plans combined.
If an employer decides to offer a Roth 401k and they match
employee contributions, the amount contributed to the plan are
still made with pretax dollars. They are kept in a separate account
and taxed when the money is taken out.
Other Similarities to a traditional 401k
- Rollovers are permitted
- Participants can begin withdrawing funds after 59½
- Participants are required to withdraw funds after
- Employees can leave your company and keep vested funds in
your plan but can't make further investments
- Withdrawing funds early incurs a 10% penalty and taxes on any
- If you permit loans, participants can withdraw funds but must
have a qualifying event (retirement, termination of service,
What does the future hold for Roth 401k?
Roth 401k plans are still in their infancy so it's too soon to
determine how it will evolve over the years. After 2010, the Roth
401k option was goin to expire , but legislation in 2006 took steps
towards making the plan permanent. Therefore, it appears that the
Roth 401k plan is here to stay.