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24 February 2010

New Retirement Savings Plan - Roth 401(k) Coming Into Effect

Retirement age savings plan, Roth 401 (k) introduced by economic growth and tax cuts Reconciliation Act 2001 will come into effect from January 2006. Unlike a traditional 401 (k) retirement, a Roth 401K plan applies to all employees, but the latter requires that contributions to a pension account with after-tax dollars, while a 401K plan allows contributions with pre-tax dollars.

You can not be allowed to contribute to a Roth IRA if your income is higher, but you can certainly qualify for a Roth 401 (k) plan, since there are no income specifications here. Additionally, you can contribute up to $ 15,000 for 2006 as a 401 (k) plan and the limit reaches $ 20,000 for persons age 50 years or older at the end of the year. The increase in the limit, known as catch-up contribution, which was a provision in the Economic Growth and Tax Reconciliation Act of 2,001th

Regarding employers' contributions, these amounts correspond to the contributions of employees, but with pre-tax dollars. Employer's contribution will be rolled up into a separate account and funds withdrawn from that account will be subjected to taxes on withdrawal.

Roth 401 (k) plan may not allow you to benefit from the contribution of pre-tax dollars, but it allows you to withdraw money tax-free after retirement. You can avoid paying income tax on the cash you withdraw from your plan account after retirement. But your age should be 59 and 1 / 2 years and you should have kept the plan accounts for more than 5 years or more. In case you withdraw money before retirement, you have to pay taxes (almost 35% of the contribution) and a 10% penalty.

A Roth 401 (k) plan can be useful because it prevents you from taxes on withdrawals after retirement. But this will help you only if your tax bracket after retirement is the same or higher than what it is now. If your current tax bracket is low, so you can contribute more to the Roth 401 (k) plan account. Your savings thus increase and you will draw a higher amount at retirement. You can also roll over your Roth 401 (k) balance into a Roth IRA when you leave your employment.

You can contribute a portion of the allowable limit, which is $ 15,000 to a Roth 401 (k) plan account and the remainder to a 401 (k) account, and thus reduce tax liability. This is due to a Roth 401 (k) allows you to contribute after tax dollars, while a 401 (k) plan account allows for pre-tax contributions.

With a Roth 401 (k) plan contributions, you do not take home more dollars, then you are allowed to accumulate after-tax dollars in the plan account. But then you do not have to pay tax on the amount taken out after retirement, and this helps you, especially if the tax bracket is higher at this time.

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