Can You Save Taxes With A Roth 401K? - By: Eric Bayne

So, you have decided to finally place your money into a 401k plan. But should you choose a traditional 401k plan or a Roth 401k plan? Here are a few of the basic rules pertaining to 401k contributions.

First, a short history of Roth 401K plans. These types of plans were first sanctioned in 2001, and went into effect in 2006, five years later. They are different from normal 401K plans, in that they allow participants to make after tax contributions. But the big advantage is that is exempts you from paying tax on withdrawals. This means that you, depending on your investment acumen, could end up making millions of dollars without paying tax on it. In addition, when you withdraw money from a Roth 401K, it doesn't count towards your Social Security income tax limits.

Prior to the Pension Protection Act, signed into law in August 2006, a person earning over $100,000 in adjusted gross income could not convert to a Roth. The law was originally set to sunset in 2010, but due to it's popularity it was extended. Starting in 2010, the limits are no longer in effect. The law also allows an employee to treat a portion of their contribution amount, up to 100%, as either a regular 401K or a Roth 401K.

An employee's combined elective deferrals-- whether to a traditional 401(k), a Roth 401(k), or to both-- cannot exceed $15,500 for tax year 2008 if a participant is under 50; if they are over 50, they may contribute an additional $5,000. Employer's matching funds are not included in the $15,500 elective deferral cap, but are considered for the maximum section 415 limit, which is $46,000 for 2008. Employers are permitted to match contributions to a designated Roth account, but the matching funds must be made on a pre-tax basis, not be made into the designated Roth account, and cannot receive the Roth tax treatment.

If you were to talk to many financial analysts, a percentage of them our tell you that there really is no difference in whether you avoid taxes at the beginning of your investment as you would with a regular 401k or at the rear. However, if you were to go through the calculations, you'll generally find that putting your money in a Roth 401K is a better deal if you think if you think you'll be in a higher tax bracket than you are now. To find out for yourself, however, many of the larger investment firms also have 401K calculators on their site where you can key in different scenarios to determine the best course of action for yourself.

There is no requirement, from the government, that a company offer Roth 401k to its employees. However, based on a survey performed by Hewitt Associates, almost one third of the companies that they asked, who were not already offering Roth 401K accounts said they were likely to begin offering them in the near future. However, that was before the global economic downturn. What the future holds is in limbo right now.

Many of the larger corporations have professionals in their human resources department that can give you help on selecting 401k options. Also, if you work with a financial planner, most of them will be able to advise you on the advantages and disadvantages of putting some or all of your investment funds into a Roth 401k plan.

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