Roth 401k is a good way to save for retirement. Even though it doesn't give you a tax break right away, when you take money out of the account in retirement, you don't have to pay income tax on it.
This tax benefit is only available to people who have had the account for at least five years, are at least 59.5 years old, or are disabled. With a Roth 401k, you can save money and pay taxes in a different way. It is a good choice for people who are just starting out in their careers and expect their income to grow in the future.
Who can get a Roth 401k:
Anyone whose employer offers a Roth 401k can use this way to save money. If a worker quits his or her job, the balance in his or her Roth 401k can be moved to a Roth IRA. One of the best things about a Roth 401k is that the account holder doesn't lose eligibility if they make a lot of money. If a person's employer doesn't offer Roth 401k yet, there is no way to help them open this account. Employers give their workers a form where they can write down some or all of the 401k contributions that will go into their Roth 401k account.
What's different about 401k and Roth 401k:
People who put money into a 401k can get some tax breaks in the year they put money in. But a 401k account holder will have to pay taxes on the money he or she put in and all the money made from investments in the future.
A Roth 401k account holder doesn't get a tax break in the year they put money in, but their earnings will never be taxed as long as the account is open. Also, someone with a Roth 401k account can roll it over to a Roth IRA. As long as the Roth IRA account is there, it will continue to grow with tax-free earnings. But taxpayers whose income is above a certain level can't get a Roth IRA.
Roth 401k has these pros:
Since tax rules allow it to be as big as a traditional account, a Roth 401k account is worth more than a traditional account. So, putting money into a Roth 401k can make a person's life much better when they retire. In the table below, you can see how much you need in a traditional account to have the same amount in a Roth account.
TAX- BRACKETAMOUNT
10 percent $111.11
15 percent $117.65
25 percent $133.33
28 percent $138.89
33 percent $149.25
35 percent $153.85
If a person is in the 33 percent tax bracket, he or she will have to take out $149.25 from a traditional account in order to spend $100. This is because the tax on the distribution is paid with $49.25. Roth 401ks give you more money in retirement because the money you take out isn't taxed.
Even though Roth 401k plans have been legal since January 1, 2006, and many companies that already offer traditional 401k plans wanted to start offering them, only a few have done so because of the extra costs. Before taking on the cost of implementing Roth 401k, these companies want to see how well it works first.
Roth 401k is a good way to save money for retirement without having to pay taxes on it. People can use it to have a worry-free retirement, without having to worry about money.
