SOLVED: Is the New Roth 401(k) for Me?
If you make too much to contribute to a Roth IRA, take a look at this new way to save.
By Mary Beth Franklin, Senior Editor
From Kiplinger's Personal Finance magazine, September 2006
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A Roth 401(k) offers all the tax-free advantages of a Roth IRA but with the higher contribution limits of a 401(k) -- $15,000 for most workers and $20,000 for those 50 and older this year.
And there are no income limits. So if you are shut out of funding a Roth IRA because you make too much money, this could be your opportunity to build up a stash of tax-free income for retirement.
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The downside is that you don't get a tax deduction for contributing to a Roth 401(k), so switching could mean a big tax hit. In the 28% bracket, for example, you'd owe $5,600 in taxes on a $20,000 contribution. And your take-home pay would be reduced compared with the same contribution to a traditional 401(k) plan.
There's no predicting what tax rates will be when you stop working, so the prospect of tax-free income in retirement is a good way to diversify your savings. One strategy is to split your contributions between the two types of 401(k) plans (as long as your combined contribution doesn't exceed the annual maximum). That way, you can preserve some of your tax deductions and accumulate tax-free income for the future.
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