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All aboard the Roth 401k train! Everything you need to know

money trainRecently a lot of employers have started to offer the roth 401k as an option. My employer started offering it last month. The roth 401k, quite frankly, is a dream come true in my opinion. Ok so thats a little exaggeration but it truely is the best of both worlds – 401k and Roth IRA.

So what exactly is it?
It is, in effect, a blend of a the traditional 401k and the Roth IRA. It is a 401k with company match, except that you invest after-tax dollars and pay no tax at the end, just like a Roth IRA.

Why is this so great?
If you are like me you plan on making more money when you retire than you are making right now. I intend to have money coming from stocks, dividends, real estate and who knows what else. Plus I am sure that I will be working at least part time. All of this adds up to me being in a higher tax bracket than I am right now. Does any one of you really plan on being in a lower tax bracket than you are right now? This means that the “roth” plan is the best choice.

Some other benefits:
-Roth IRAs are limited to $5000.00. With a Roth 401k you can contribute up to $15,500.00
-Roth 401k allows you to actually put MORE money in per year than a traditional 401k because it is after tax. Assuming you are in a 25% tax bracket, 15,500 in a roth 401k is like putting 20,667 in a traditional 401k.
-If you leave your job or are fired you can roll the roth 401k into a roth IRA.
-NO income limit

Special rules that are different from all other accounts:

-You can withdrawl contributions as in an IRA however the account must have been open for more than 5 years
-Employer match much sit in a pretax account
-Cannot be converted to a regular 401k

Some other big things to consider:
-These kinds of accounts are only available until 2010. The government may or may not renew them, so don’t waste the opportunity.
-Common sense says that considering our current national debt, taxes will be higher in the future.

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