As adults face the reality that they will likely live longer than their parents did, they are scrambling to devise a retirement investment strategy. After all, increased life span requires an increased retirement nest egg. Also the shaky economic situation has many people wondering if their pension or Social Security benefits will be enough when the time comes. To combat these unknowns, many people turn to a Roth 401k to bolster their retirement investment portfolio.
Concept
First enacted in 1998, Roth 401k plans are often one of the cornerstones of a wise retirement investment strategy. These are similar to the Roth IRA (or Individual Retirement Account) in that post-tax funds (net earnings) are used to fund the investment. This means that the money used has already been subject to taxation.
How It Works
A Roth 401k operates largely like a traditional 401k retirement plan. Employers denote the contribution limit that they will match for their employees. With a traditional 401k, that money would come out of a person's paycheck prior to taxation. However, in a Roth 401k, the funds would come out of net earnings. Also, these would count against limits for any personal Roth investments for the year. It is also important to note that while Roth contributions by the employee are safe from future taxes, the employer contribution portion is not. These would be taxed upon the disbursal of the account. At first, post-tax contributions might not seem like a benefit, and for some people, it is not. However, for tax payers who are in a lower tax bracket yet anticipate being in a higher one at retirement, this is a truly wise choice since the earnings on a Roth investment are not subject to taxation. These funds come out of the yearly limit for investor's contributions to Roth accounts.
Rules
Roth 401k accounts cannot be rolled into a traditional 401k account at any time. However, Roth 401k retirement plans can be rolled into Roth IRA retirement plans at a later date. With a Roth 401k, employees must begin to collect their payments at the age of 70 and a half, which is the case with a Roth IRA and other retirement plans.
Roth 401k contribution limits are the same as a regular 401k plan. For 2014, the individual contribution maximum was $17,500 if under the age of 50, and if older than 50 years of age, one can add $5,500 in a catch up contribution since they are nearing retirement age.
