Roth 401k New Retirement Savings Plan.
Below is a MRR and PLR article in category Finance -> subcategory Personal Finance.
Roth 401(k): An Innovative Retirement Savings Option
Overview
The Roth 401(k), a new employer-sponsored retirement plan, merges features of a traditional 401(k) and a Roth IRA.
Background
Recent tax reforms under the Bush administration, specifically the Economic Growth and Tax Relief Reconciliation Act of 2001, introduced significant changes. These included reduced income tax rates, elimination of the marriage penalty, and steps toward abolishing the "death tax." A notable outcome of this act was the introduction of the Roth 401(k), effective January 1, 2006.
How the Roth 401(k) Works
Similar to a traditional 401(k), the Roth 401(k) involves employees investing part of their income, often accompanied by employer contributions. The key difference lies in taxation: traditional 401(k) contributions are made with pre-tax dollars and taxed upon withdrawal, whereas Roth 401(k) contributions are made with after-tax dollars, allowing for tax-free withdrawals in retirement, akin to a Roth IRA.
Employer Participation and Contribution Limits
Despite its benefits, the Roth 401(k) isn't mandatory for employers to offer. A survey by Hewitt Associates showed that only 31% of employers currently providing a traditional 401(k) are considering adding the Roth 401(k) to their offerings.
For 2005, contribution limits stood at $14,000 for 401(k) plans and $4,000 for IRAs, whether Roth or traditional. In 2006, these limits increased to $15,000 for both 401(k) plans and IRAs.
The Roth 401(k) represents a flexible and potentially advantageous retirement savings strategy, though availability may vary by employer.
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