Roth 401K is a kind of plan for retirement savings that is authorized by US congress. It falls under Internal Revenue Code. Its features combine the normal 401(k) retirement plan with the IRA plan. Anyone is eligible to join this plan so long as his employer offers it. It is the discretion of the employer to decide if he will provide this service in addition to the traditional one.
With this plan an employee can choose to contribute some funds through the post-tax elective deferral instead of or in addition to pretax elective deferral under his traditional 401(k) retirement plan. The employer is permitted to contribute a matching amount on the employee's set Roth contributions. Such contributions by the employer are allocated to the pre-tax account.
This savings plan is funded by after-tax dollars unlike traditional 400(k) that is funded by pre-tax dollars. This means that any earnings on Roth are tax free and also penalty free. This applies if the distribution is made at least 5 years after the investor makes his first contribution and before he attains 59 and a half years. The workers contribute through payroll deductions just like in other retirement plans.
This plan is especially ideal for younger employees who are currently being taxed in a low tax bracket but who expect to pay higher taxes when they reach the age of retirement. As an employee, one is able to roll his contributions to a Roth IRA account if his employment is terminated. When it comes to retirement, one can roll over his funds to Roth IRA tax free.
There are many benefits of joining this plan. Since you make the contributions with after-tax dollars, the account is able to grow tax-free. If you make any withdrawals during retirement, they are not subject to income tax so long as you have had the account for at least five years and you are at least 59 and a half years old. The prospects of tax-free money makes this plan very attractive to many individuals.
Individuals with high incomes who are not able to contribute to traditional plans due to some restrictions in their income could find this plan beneficial. This is because this system has no such restrictions. It does not require the investor to meet certain income thresholds in order to participate. Those who would like to have tax-free withdrawals but their income is more that the traditional plans threshold would also find it ideal.
This system could also be beneficial to those who would like to diversify their future tax risk. It is always advisable to invest in different investment vehicles or accounts which are taxed differently. This investment plan offers a great alternative to tax-free investments compared to other tax-free investments. The future is unforeseeable and one never knows when such a plan may come in handy.
Adoption of Roth 401K is gaining momentum. It is an additional way of diversifying investments for the future. Some of the large firms have adopted it and this has motivated even the smaller firms to adopt it. This plan is now a permanent legislation and is thus here to stay.
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