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The ABC's of the Roth 401(k) Plan

Now that Roth 401(k) plans have become a permanent fixture, more companies are offering this option to employees.  With that in mind, let's take a look at the major features of this relatively new type of retirement plan.

First of all, it's at your employer's discretion as to whether or not employees will have access to a Roth 401(k) plan together with your existing 401(k) plan.  If so, all employees who wish to participate will have 2 accounts, the regular 401(k) with pre-tax contributions and the Roth 401(k) with after-tax contributions.  You must declare in advance which type of plan you wish to contribute to, and you may use a combination of both.  However, your combined contributions still can't exceed $18,000 this year ($24,000 if you're over 50). Employer matches, if any, will go into your traditional 401(k) account.

Unlike Roth IRAs, anyone can contribute to a Roth 401(k), regardless of income. Also, if and when the time comes, anyone, regardless of income, can rollover a Roth 401(k) to a Roth IRA.  The best part is that distributions from a Roth 401(k) are tax-free to you as long as you started contributing to the plan at least 5 years ago and you are older than 59 1/2.

So now the question is: should you make use of this new option or stick with the old- fashioned 401(k)? The answer depends on your financial circumstances, your objectives and some assumptions about the future, but we'll explore some situations that would make Roth 401(k) contributions attractive in the next blog post.