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Encyclopedia > Roth 401(k)

The Roth 401(k) is a type of retirement savings plan. It was authorized by the United States Congress under the Internal Revenue Service Code, section 402A [1], and represents a unique combination of the Roth IRA and a traditional 401(k) plan. As of January 1, 2006 U.S. employers have been free to ammend their 401(k) plan document to allow employees to elect Roth IRA type tax treament for a portion or all of their retirement plan contributions. The same change in law allowed Roth IRA type treatment for 403(b) retirement plans. The Roth retirement plan provision was enacted as a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001), Retirement is the point where a person stops employment. ... In common usage, saving generally means putting money aside, for example, by putting money in the bank or investing in a pension plan. ... Type Bicameralism Houses Senate House of Representatives United States Senate Majority Leader Harry Reid, D, since January 4, 2007 Speaker of the House Nancy Pelosi, D, since January 4, 2007 Members 535 plus 4 Delegates and 1 Resident Commissioner Political groups (as of November 7, 2006 elections) Democratic Party Republican... Seal of the Internal Revenue Service The Internal Revenue Service (IRS) is the United States government agency that collects taxes and enforces the internal revenue laws. ... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes... A Roth IRA is an individual retirement account (IRA) allowed under the tax law of the United States. ... The 401(k) plan is a type of employer-sponsored retirement plan in the United States and some other countries, named after a section of the U.S. Internal Revenue Code. ... January 1 is the first day of the calendar year in both the Julian and Gregorian calendars. ... For the Manfred Mann album, see 2006 (album). ... A 403(b) plan is a tax advantaged retirement savings plan available for public education organizations, some non-profit employers (only US Tax Code 501(c)(3) organizations) and self-employed ministers in the United States. ... A retirement plan is an arrangement to provide people with an income, or pension, during retirement, when they are no longer earning a steady income from employment. ... The Economic Growth and Tax Relief Reconciliation Act of 2001 was a sweeping piece of tax legislation in the United States. ...


Traditional 401(k) and Roth IRA plans

In a traditional 401(k) plan, introduced by Congress in 1978, employees contribute pre-tax earnings to their retirement plan, also called "elective deferrals". That is, an employee's elective deferral funds (currently up to $15,500 for those under age 50 and $20,500 for those over) are set aside by the employer in a special account where the funds are allowed to be invested in various options made available in the plan. 1978 (MCMLXXVIII) was a common year starting on Sunday. ... Deferred, in accounting, is any account where the asset or liability is not realized until a future date, e. ... In accountancy, an account is a label for recording a quantity of almost anything. ... Invest redirects here. ...

Employers may also add funds to the account by contributing matching funds on a fractional formula basis (e.g., matching funds might be added at the rate of 50% of employees' elective deferrals), or on a set percentage basis. Funds within the 401(k) account grow on a tax deferred basis. When the account owner reaches the age of 59-and-a-half, they may begin to receive "qualified distributions" from the funds in the account; these distributions are then taxed at ordinary income tax rates. Exceptions exist to allow distribution of funds before 59 and a half, such as Substantially equal periodic payments, disability, and separation from service after the age of 55, as outlined under IRS Code section 72(t). A cake divided into four equal quarters. ... In mathematics and in the sciences, a formula (plural: formulae, formulæ or formulas) is a concise way of expressing information symbolically (as in a mathematical or chemical formula), or a general relatx E=mc² (see special relativity). ... Under the United States Internal Revenue Code, the type of income is defined by its character. ... Substantially equal periodic payments (SEPP) are one of the exceptions in the United States IRS Code that allows receiving payments without penalty from a retirement plan or deferred annuity before the usual 59 1/2 age restriction under certain circumstances. ...

Under a Roth IRA, first enacted in 1996, individuals, whether employees or self-employed, voluntarily contribute post-tax funds to an individual retirement account (IRA). In contrast to the 401k plan, the Roth plan requires post-tax contributions, but allows for tax free growth and distribution, provided the contributions have been invested for at least 5 years and the account owner has reached age 59 and a half. The amounts of income that can be invested in a Roth IRA are significantly more limited than those to a 401(k) are. For 2006, individuals are limited to contributing no more than $4,000 to a Roth IRA, if under age 50, and $5,000, if age 50 or older. Additionally, Roth IRA contributions are prohibited when taxpayers earn a Modified Adjusted Gross Income of more than $110,000, ($160,000 for married filing jointly). 1996 (MCMXCVI) was a leap year starting on Monday of the Gregorian calendar, and was designated the International Year for the Eradication of Poverty. ... In U.S. tax law, modified adjusted gross income is determined by taking income from all sources (total, or gross income) and then making adjustments downward to arrive at adjusted gross income (AGI). ...

The Roth 401(k) plan

The Roth 401(k) combines some of the most advantageous aspects of both the 401(k) and the Roth IRA. Under the Roth 401(k), employees can decide to contribute funds on a post-tax elective deferral basis, in addition to, or instead of, pre-tax elective deferrals under their traditional 401(k) plans. An employee's combined elective deferrals-- whether to a traditional 401(k), a Roth 401(k), or to both-- cannot exceed $15,500 for tax year 2007 if a participant is under 50; if they are over 50, they may contribute an additional $5,000. Employer's matching funds are not included in the $15,000 elective deferral cap, but are considered for the maximum section 415 limit, which is $44,000 for 2007. Employers are permitted to match contributions to a designated Roth account, but the matching funds must be made on a pre-tax basis, not be made into the designated Roth account, and cannot receive the Roth tax treatment. (Pub 4530)

In general, the difference between a Roth 401(k) and a traditional 401(k) is that the Roth version is funded with after-tax dollars while the traditional 401(k) is funded with pre-tax dollars. After tax dollars represent money for which taxes are paid on in the current year, and pre tax dollars are dollar which do not represent federal taxable income in the current year. Typically, the earnings on Roth contributions will be tax free as long as the distribution is made at least 5 years after the first Roth contribution and the attainment of age 59 and one half, unless an exception applies.

A Roth 401(k) plan will probably be most advantageous to those who might otherwise choose a Roth IRA, for example, younger workers who are currently taxed in a lower tax bracket, but expect to be taxed in a higher bracket upon reaching retirement age. The Roth 401(k) offers the advantage of tax free distribution, but is not constrained by income limitations. For example, normal Roth IRA contributions are limited to $4,000; whereas, up to $15,000 could be contributed to a Roth 401(k) account, provided no other elective deferrals were taken for the tax year (no traditional 401(k) deferrals taken). Tax brackets are the divisions at which tax rates change in a progressive tax system (or an explicitly regressive tax system, although this is much rarer). ...

Adoption of Roth 401(k) plans has been relatively slow, and stated reasons for this include the fact that they require additional administrative recordkeeping and payroll processing. [1] However some larger firms including General Motors have now adopted Roth 401(k) plans, and this is expected to spur their adoption by other firms including smaller ones. [2] General Motors Corporation, also known as GM, is the worlds largest car manufacturer. ...

Additional considerations

  • Roth 401(k) contributions are irrevocable, such that once money is invested into a Roth 401(k) account; it can not be moved to a regular 401(k) account.
  • Employees are able to roll their Roth 401(k) contributions over to a Roth IRA account upon termination of employment.
  • It is the employer’s decision as to whether the company will provide access to the Roth 401(k) in addition to the traditional 401(k). Many employers may feel that the added administrative burden outweighs the benefits of the Roth 401(k)
  • The Roth 401(k) plan will now be available after December 31, 2010 since legislative action was taken to extend the program. The program was originally set up to sunset, or no longer be in place, after 2010 along with the rest of EGTRRA 2001.
  • Unlike Roth IRA's, owners of Roth 401(k) accounts (designated Roth accounts) must begin distributions upon reaching age 70 and a half, similar to required minimum distributions for IRA and other retirement plans. (Pub 4530)

The examples and perspective in this article or section may not represent a worldwide view. ... Organisational use In some organisational analyses, administration can refer to the bureaucratic or operational performance of mundane office tasks, usually internally oriented. ... December 31 is the 365th day of the year (366th in leap years) in the Gregorian Calendar. ... This article or section does not cite its references or sources. ... Legislation (or statutory law) is law which has been promulgated (or enacted) by a legislature or other governing body. ... In public policy, a sunset provision or sunset clause is a provision in a statute or regulation that terminates or repeals all or portions of the law after a specific date, unless further legislative action is taken to extend it. ...


PDF is an abbreviation with several meanings: Portable Document Format Post-doctoral fellowship Probability density function There also is an electronic design automation company named PDF Solutions. ...


  1. ^ Wait-and-see stance for Roth 401(k), Andrea Coombes 2005
  2. ^ A New Type of 401(k) Picks Up Steam, Jeff D. Opdyke 2006

External links

  Results from FactBites:
Roth 401k - Wikipedia, the free encyclopedia (681 words)
The Roth IRA effectively reverses the order of the 401k and allows for post-tax contributions, but tax free growth and qualified distributions, if the contributions have been invested for at least 5 years.
The basic difference between a Roth 401(k) and a traditional 401(k) is that the Roth version is funded with after-tax dollars while the traditional 401(k) is funded with pre-tax dollars.
Additionally, normal Roth IRA contributions are limited to $4,000; whereas, up to $15,000 could be contributed to a Roth 401k account, provided no other elective deferrals were taken for the tax year (no traditional 401k deferrals taken).
A tax-free retirement just got closer - MSN Money (1006 words)
A 401(k) lets you defer paying taxes on your savings until you withdraw the money in retirement, when your income tax rate is likely to be lower.
If that same person were to choose a Roth 401(k) instead, the 25% tax would be levied on the full $50,000 and the tax would be $12,500, an increase of $1,250.
But that same $15,000 contributed to a Roth 401(k) would leave her with a bill of $25,200, a difference of $4,200.
  More results at FactBites »



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