Define: Roth 401(k) and 403(b) Retirement Plans
Roth + 
Want the best of both worlds? Your employer may offer Roth IRA-esque options on its 401(k) and 403(b) plans. As sprits of refresher on your IRA knowledge, Roth IRAs are the IRAs that offer no tax deductible upfront, but allow you money and its earnings to grow unfettered by taxes, and there’s no income tax on distributions. All funds are contributed post-tax, so Uncle Sam has already gotten his stake. That’s one way a Roth 400- something differs from a regular 400-something plan.
But remember the pay off here, distribution is tax free.
With a ROTH 400- something plan, the limit for contributions remains the same as regular 401(k)/403(b) plans: $15,000 for the under 50 crowd, and $20,000 for those over 50. This total number doesn’t change, so if you have a traditional 401(k) and Roth 401(k) at through an employer at age 36, you may only contribute $15,000 in total to both accounts. Any matching funds from your employer are not included in this cap. And on that note, any funds your employer matches with will be to a traditional 400-something plan. Apparently, congress is still working out some of the quirks of the Roth 400- something plans.
Akin to a traditional 4 something plan, or even a traditional IRA, there is an age when you are required to start distributions – the April of the year you turn 70 ½. You can avoid this by rolling over a Roth 4 something into a Roth IRA when you retire, but prior to this big day, to keep on making money on your Roth. However, if you roll over the five year clock to tax free withdrawal is reset and begins anew with the rollover.
As you get closer to retirement, you’re going to want to make sure that your portfolio is spread across a diverse group of securities – for more on that check out portfolios, assets and diversification in The Basics.
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Unique to this rollover situation hybrid is how withdrawn money is taxed. The money that comes out first is proportioned between earnings and contributions. If an account is worth $20,000, of which $16,000 was contributions, then the first withdrawal would be 20 percent earnings and 80 percent contribution. These earning would only tax free if the investor is over 59 1/2 and the account has been open for over five years.
So the pros of this account are the benefits of a Roth combined with the benefits of a 401(k)/403(b) plan. Since it’s a recently authorized plan, the full benefits remain to be seen. Think of it as a rose but from a new vintner and of a new vintage. The true benefit and virtue remain to be seen.