Common Roth 401k Questions and Answers

Introducing the Roth 401(k)By Wilson Ziegler, Staff Writer

Since 2006, an increasing number of employers have been offering the Roth 401k option to their employees. This plan works exactly like the traditional 401k, but allows you to make contributions with after-tax dollars, the same way that you would with a Roth IRA fund. The concept of the Roth 401k was actually introduced with the Economic Growth and Tax Reconciliation Act of 2001, which allowed employers to begin offering these plans as of January 1st, 2006. There are no income stipulations for the Roth 401k, which makes it a potential help to higher-income workers who are unable to contribute to a regular Roth IRA, but middle-income workers may want to consider the Roth 401k option carefully since it will result in a take-home pay cut. Only your personal financial planner can help you determine whether a Roth 401k is truly right for you, but you can learn more about this option with the following Roth 401k Frequently Asked Questions and Answers.

Frequently Asked Questions:

Question: How do I find out if I am eligible for a Roth 401k?

Answer: If it is offered by your employer, than you are eligible for the Roth 401k. However, keep in mind that employers are not required to offer this option, and many have reservations about doing so because of the increased costs and manpower required to educate their employees about the Roth 401k.

Question: What are the contribution limits or rules for the Roth 401k?

Answer: In most cases, Roth 401ks are subject to the same contribution limits as traditional 401k plans, which allow workers to save thousands of dollars of tax-free retirement income-much more than with a traditional IRA. It is important to point out, however, that the limits apply to both types of 401k plans simultaneously, so it isn't possible to save $15,000 in a Roth 401k and another $15,000 in a traditional 401k plan.

Question: How do the early withdrawal regulations differ between a Roth 401k and a traditional 401k?

Answer: Usually, Roth 401k withdrawal regulations and requirements are the same as traditional 401ks, but you should ask your plan manager to make sure, since some companies will have different policies.

Question: If I change jobs, what will happen to my Roth 401k?

Answer: In the event that you leave your job, your Roth 401k balance can be rolled over into a traditional Roth IRA fund.

Question: What about the employer match option?

Answer: As with traditional 401ks, employer matches will be made with pretax dollars, and the amount will accumulate in a separate account, to be taxed as income at the time of withdrawal.

Question: How do I know if a Roth 401k is a good option for me?

Answer: Depending on your income bracket, you may want to consider staying with a traditional 401k, if the idea of less take-home pay is a concern. Talk to your financial planner to examine your options, and to determine whether a Roth 401k is a smart investment move for you.