The NEW Roth 401k Plan
There's a new retirement plan soon to be available. It's called
a Roth 401k. President Bush brought this about in his 2001 tax
cuts. This is a combination of two retirement funds - a 401k and
a Roth IRA. But what does it mean?
Your 401k plan is pretax money set aside to grow as an
investment. Your employer takes pretax money out of your check
and allows you to direct the funds usually into mutual funds.
401k's have another advantage - since it's pretax money you take
out of your check, your net pay is lowered, reducing the amount
of taxes you pay. When you retire, then you draw out of your
401k what little you need and pay the taxes on it. When you
retire, your income stream is gone, and so is your tax bracket.
As you draw out your money from your 401k, then you hopefully
enter a relatively low tax bracket and pay little on the
proceeds.
Enter the Roth IRA. A Roth IRA is funded by after tax dollars.
Anything put into this account will never be taxed again. You
can open up your own Roth IRA account anywhere - even at a bank.
Since the money is after tax, its just like you cashed your
paycheck and are going shopping. The good news is you are taxed
once on the front end, and then later when you remove the money,
you won't owe the government any taxes.
When you combine the two, you should be able to invest into your
401k with after tax dollars, and as it grows, and you retire,
when you remove the funds, they will not be taxed. 31% of
employers who have 401k plans say they plan to add this option
for their employees. The bad news - your employer doesn't have
to add this as option.
Why wouldn't I just go open my own Roth IRA and direct the funds
in a mutual fund? Good question. The real advantage to the
average worker is that money is taken out of your check and you
won't see the money. Makes it easier to invest. You don't see
the money as it's taken out before they deposit your check. The
#1 rule is to put money into your 401k no matter what options
they give you. This new Roth 401k will start January 1st, 2006.