Roth 401(k) Plan
Error creating thumbnail
|This article is a part of Wikinvest's Personal Finance section and Guide to Investing. Please contribute or edit to improve it.|
A Roth 401(k) is a retirement savings plan which allows an individual to save for retirement and grow his investments without paying taxes on capital gains and dividends. A Roth 401(k) is administered by the employer and combines the function of a 401(k) and a Roth IRA. Unlike a regular 401(k), contributions to a Roth 401(k) are not tax-deductible; however, withdrawals upon retirement are not taxed.
Since the Roth 401(k) is funded by after-tax dollars, individuals can withdraw their contributions to the account without facing any penalty or taxes. However, withdrawals beyond contribution cannot be made till the employee reaches the age of 59½ and has had the account for 5 years (except under special circumstances). Withdrawals (above contribution) before this age are subject to 10% penalty and income taxes. For example: if someone has contributed $25,000 to a Roth 401(k) and had gains of $3,000, he would be allowed to withdraw up to $25,000 without paying a penalty.
Moreover, the owner of these accounts, must to take minimum distributions, i.e. they are required to withdraw, starting at the age of 70½. This is mandatory, unless the account holder continues to work for the employer who sponsored the plan at the age of 70½ or is a 5% owner of the company.
Roth 401(k) plans are offered through an employer. By participating in this plan, an employee authorizes the employer to retain part of their salary for these plans. Most human resources departments will have details on starting such an account with the employer.
When leaving an employer, a employee can choose to leave the Roth 401(k) with his old employer -- in many cases, employers will charge a fee for managing Roth 401(k) plans of ex-employees. An individual can also cash out his Roth 401(k), but this would result in a penalty of 10% on amounts above his contribution. The best option is to rollover a Roth 401(k) to a Roth IRA, or a new Roth 401(k).