Roth 401k January 1, 2006

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRA) will allow a new type of 401k to be established January 1.  Many large companies may decide to offer the Roth 401k plan. Ask your plan administrator if this new Roth is available.

Roth 401k Basics

The rules for the Roth 401k are very similar to the Roth IRA account, but there are some important differences.  In a Roth 401k, income taxes will be paid at the time of contribution at your regular income tax rates, and earnings and withdrawals are not taxed if withdrawals begin after age 59 1/2 and if 5 years have elapsed from the date of the first contribution to the plan.  

Remember in your existing 401k plan, those contributions are pre-tax and will be taxed as ordinary income when withdrawn.

Here are some answers to questions about Roth 401(k)s:

How much can I save?

The maximum contribution levels are the same for traditional and Roth 401(k) plans. In 2012, workers under age 50 can contribute up to $17,000 to a 401(k) plan. Workers age 50 and over can contribute up to $22,500 next year.

Can I invest in a regular 401(k) and a Roth 401(k)?

Yes, as long as you don't exceed the contribution limit. For example, you could contribute $8,5000 to a regular 401(k) and $8,500 to a Roth 401(k).

IRS Faq Sheet January 2006