In 2006 a new retirement account was signed into law. It is a component of a “regular” 401(k) Plan; however, the funding of a “Roth” 401(k) Plan is with AFTER-TAX dollars.
This is similar to the Roth IRA but with higher funding limits and no limit on earnings to contribute. Money contributed to a Roth 401(k) Plan grows without tax and is distributed without tax. For 2016, of which you have until April of 2017 to contribute, the funding limit is $18,000, or $24,000 if over the age of 50. The funding limits for 2017 contributions will be $18,000 and $24,000 if over age 50.
Ask yourself the following question
Roth 401(k) Plans
Will you grow more wealth funding a Roth 401(k) in a non-deductible manner where the money grows then comes out income tax free?
Will you grow more wealth income-tax deferring money into a traditional 401(k) where the money withdrawn is fully income taxable at your current income tax bracket?
The answer is… it depends. The real world answer about Roth plans is that the vast majority of readers will in fact be better off using Roth Plans over traditional income tax deferred plans.
Who should use a Roth 401(k)?
Anyone who will be retiring in the same or higher tax bracket.
Anyone who will be retiring in a tax bracket within 10% of their current tax bracket.
For example, if you are in the 40% tax bracket and will retire in the 30% tax bracket, using a Roth Plan is still a better financial tool than using a traditional tax-deferred retirement plan.
Roth IRA Conversions?
Do They Make Sense? The Answer Will Shock You!
It’s simply when you convert a traditional tax-deferred IRA to a Roth IRA where, once converted, the money is allowed to grow tax-free and come out tax-free. Income taxes are due on ALL of the money in the IRA at the time of conversion. If you convert before age 59.5, the normal 10% penalty for early withdrawal is waived so long as you wait 5 years before taking money out of the new Roth IRA and are over 59.5 when taking withdrawals. Read On. …