There’s a new retirement investing option being rolled out across the United States, the Roth 401(k). The new option allows you to take your after-tax income, invest in mutual funds or stocks, defer taxes on earnings, and begin untaxed withdrawals upon retirement.
Since the limit in all 401(k) accounts per individual doesn’t change, if your employer offers and you decide to take advantage of the new investment account, you’ll have to split the same $15,000 limit ($20,000 for those over 50) between the traditional and Roth 401(k).
The law that has brought the account into existence is scheduled to expire in 2010 unless congress extends the law.
This article from the Associated Press highlights the positive about the account:while an article from the Philadelphia Inquirer outlines the negative.
Why aren’t Roth 401(k)s as good as they sound?
Mainly because they lack the traditional 401(k)’s up-front tax deduction on contributions. A worker in the 25 percent tax bracket could save $2,500 in income tax by putting $10,000 into a traditional 401(k), allowing him to save more, supercharging investment results.
Having those extra funds in the traditional 401(k) accelerate the compounding of returns.
My company will be offering the Roth 401(k) later this year — they’re still developing the programming and promotional materials. I don’t think I’ll be taking advantage at the moment. I’m investing in the traditional 401(k) and my personal Roth IRA — and I’m just about evenly split between the two.
Updated July 16, 2010 and originally published February 1, 2006. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.