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Author: Simon Fox Article source: http://www.articlealley.com/. Used with author's permission.
Brand new employer sponsored retirement plan is a hybrid of a traditional 401k and a Roth IRA.
Income tax rates have been cut, the marriage penalty done away with, and the death tax is also on a path to no more. All of this is a result of the Bush administration's Economic Growth and Tax Relief Reconciliation Act which was passed by a Republican congress in 2001. Another provision of that act went into effect on January 1st, 2006, a hybrid of a traditional 401k and a traditional Roth IRA called the Roth 401k.
Yet another employer sponsored savings plan, the new Roth 401k works in almost the same way as a traditional 401k plan. Workers invest a portion of their income into a fund along with contributions from their employer (if any). The difference is that the traditional 401k is funded with pre-tax dollars and the Roth 401k plan uses after-tax dollars. However, with the Roth 401k, withdrawal of your money at retirement will be tax free like a Roth IRA. The traditional 401k plan defers the tax owed during your career until retirement.
Although it may sound like the best of both worlds, it is important to note that no employer is required to offer this new Roth 401k plan. In fact, a recent survey by employee benefits consulting firm Hewitt and Associates found that only 31 % of employers currently offering the traditional 401k plan are considering implementing the new Roth 401k.
Contribution limits for the retirement plans were: in 2005, $14,000 for a 401k and $4,000 for an IRA, whether Roth or traditional. This year, this amount will increase to $15,000 for both 401k and IRAs.
Simon Fox manages HowMuch? Answers - Guide to personal finances.
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