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A Closer Look At The Roth 401k
By Joseph Kenny
Roth 401k is a good retirement savings option. Although it does not provide an up-front tax-deduction, the account eventually becomes tax-free, because the withdrawals taken at retirement are not subject to income tax.
This tax benefit can only be provided to persons who are at least 59.5 years old, or are disabled, and who have held the account for a minimum period of five years. Roth 401k provides an opportunity to save with a different kind of tax treatment. It is a good option for those who are just starting their careers, and expect their income to grow in the future.
Eligibility for Roth 401k:
Anyone whose employer offers Roth 401k is eligible for this investment option. If an employee leaves his/her job, the Roth 401k balance can be rolled over into a Roth IRA. One major benefit of enrolling in Roth 401k is that an account holder does not lose eligibility when the income becomes very high. There is no provision of helping a person open this account if his/her employer does not offer Roth 401k yet. Employers provide a form to their employees to state some, or all, of their 401k contributions that will go into their Roth 401k account.
Difference between 401k and Roth 401k:
401k makes available some tax relief in the year a person may have contributed into the account. However, a 401k-account holder is liable to pay taxes on his/her contribution, along with all the investment earnings, later.
A Roth 401k account holder does not get any tax benefit in the year of the contributions, but all the earnings in the account will be free of tax for as long as the account exists. Besides, a Roth 401k-account holder can roll his/her account to a Roth IRA. The Roth IRA account continues to grow with tax-free earnings for as long as it exists. However, Roth IRA is not available to taxpayers with an income above a certain level.
Advantages of Roth 401k:
Since tax
rules allow
a person to make it as large as a traditional account, the Roth 401k
account is more valuable compared to it. Therefore, saving in a Roth
401k account can make a person much better off at retirement. Given
below is a table showing the amount required in a traditional account
to have the equivalent of $100 in a Roth Account.
TAX- BRACKETAMOUNT
10%$111.11
15%$117.65
25%$133.33
28%$138.89
33%$149.25
35%$153.85
If
a person is in the 33% tax bracket, he/she will have to withdraw $149.25
from a traditional account in order to spend $100. This is because
$49.25 is used to pay the tax on the distribution. Roth 401k provides
more wealth at retirement, as the distribution from it is tax-free.
While
many companies that already have the traditional 401k plans, wanted
to implement Roth 401k plans, which have been effective from January
1,2006 according to the law, in reality only a few actually have done
it, because of the extra expenses involved. These companies want to
first observe the success of Roth 401k before actually undertaking
the cost of the implementation.
Roth 401k is a good investment
option to save tax-free earnings for retirement. People can take advantage
of it to be able to have a secure retirement, which is free from monetary
worries.
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