New Retirement Savings Plan - Roth 401(k) Coming Into Effect
The Retirement savings plan, Roth 401(k) introduced by the Economic Growth and Tax Relief Reconciliation Act, 2001 will come into force from January 2006. Unlike a traditional 401(k) Retirement Plan, a Roth 401k plan applies to all employees but the latter requires the contributions to the plan account with after-tax dollars while a 401k plan allows for contributions with pre-tax dollars.
You may not be allowed to contribute to a Roth IRA if your income level is higher but you can certainly qualify for a Roth 401(k) plan, as there are no income specifications here. In addition, you can contribute up to $15,000 for 2006, as in a 401(k) plan and the limit reaches $20,000 for individuals turning 50 years of age or older by the end of the year. The increase in the limit is termed as the catch-up contribution which was a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001.
As far as the employers' contributions are concerned, these amounts will be matching the contributions of employees but with pre-tax dollars. The employer contribution will be rolled up in a separate account and funds withdrawn from that account will be subjected to taxes on withdrawal.
The Roth 401(k) plan may not allow you to get the benefit of the contribution from pre-tax dollars but it allows you to withdraw tax-free money after retirement. You can avoid paying income tax on the cash you withdraw from your plan account after retirement. But your age should be 59 and 1/2 years and you should have held the plan account for more than 5 years or more. In case you withdraw money before retirement, you will have to pay taxes (almost 35% of the contribution) and a 10% penalty.
A Roth 401(k) plan can be helpful as it prevents you from tax payments on withdrawal after retirement. But this will help you only if your tax bracket after retirement is same or higher than what it is now. If your current tax bracket is low, then you can contribute more towards the Roth 401(k) plan account. Your savings thus increase and you get to withdraw a higher amount at retirement. You can also roll over your Roth 401(k) balance into a Roth IRA whenever you leave your employment.
You can contribute a part of the allowed limit, which is $15,000 to a Roth 401(k) plan account and the rest to a 401(k) account, and thereby reduce the tax payments. This is because a Roth 401(k) allows you to contribute after-tax dollars whereas a 401(k) plan account allows for pre-tax contributions.
With a Roth 401(k) plan contribution, you don't take home several dollars since you are allowed to accumulate after-tax dollars into the plan account. But then you don't have to pay taxes on the amounts taken out after retirement and this helps you especially if the tax bracket is higher at that time.
Lance Williams is working as a content developer for : www.mortgagefit.com. He specializes in mortgage and real estate concepts.
Article Source: http://www.ArticleGeek.com - Free Website Content
More Resources
Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exitingMore Investing Information:
Related Articles
Annuity Investment Guide
While there is not a lack of information on annuities, there certainly is a lack of good information. In an age full of information, we are constantly bombarded with irrelevant data.
Wit and Wisdom on Money, Wall Street and Success - Part #1
I love to collect quotes as they concisely promote a philosophy which is readily understandable.In my 25+ years of investing I have collected hundreds of quotes related to Wisdom, Wall Street and Success.
The Perfect Economy?
The U.S.
The High Price of Oil
In less than four years, the price of oil has risen about 300%, or over $50 a barrel. The Light Crude Continuous Contract (of oil futures) hit an all-time high at $67.
Six Principles of Successful Investing
1. Begin investing immediatelyProcrastination is the number one enemy of investing.
Bad News - Why The Financial News Media Can Cost You Money!
The communication innovations we have around us today like the internet, financial newspapers, and special interest television channels focused on investing like CNBC are a high speed pipeline of nonsensical chatter. All these sources of information mean that there is no shortage of media people trying to answer our questions about the stock market and specific stocks.
What Age Should I Start Saving For Retirement?
Ask this question to 100 people and you will receive 100 very different answers. The fact of the matter is there is no right age to start.
Shareholders Meeting Changing With Times
A significant number of corporations that settled accounts in the past year are ready to hold their annual shareholders meetings.In this year's meetings, more than 300 companies plan as their main focus of attention defense measures against hostile takeover bids.
Stock Market Money Management Skills
Let's start by saying: You can't be afraid to take a loss. The investors that are the most successful in the stock market are the people who are willing to lose money.
How To Create Wealth In The Stock Market
First and foremost, an opportunistic strategy for creating wealth in the stock market is needed. And the opportunistic strategy for creating wealth in the stock market must have two ingredients, a plan and a goal.
Discipline in Investing and Trading
Discipline can be simply defined as your ability to follow your investing and trading plan.Discipline is a rather simple concept.
CYA
You all know what CYA stands for. Of course,Cover Your Assets.
The Real Cost of a Bad Habit
What is the value of a good habit? Think of some daily habits, like brushing your teeth, or buckling a seat belt, or flushing. All of these habits have value important to some part of life.
Brain Snappers and Other Wall Street Nonsense
The last time you spoke with your broker did he use any of the following words? Diversification,Price-to-earnings ratios, discretionary trading,lifting a leg (he's talking to you not yourdog), leverage, divergence, fee-basedcompensation, escalator clause, tactical assetallocation and other mesmerizing words to placeyou in stupefying shock.Brokers do that to let you know that you don't know anything about the market and you mustallow them to make decisions for you.
Can Your Annuity Do This?
Okay, so I can tell you I have sat in front of countless numbers of people who have made mistakes when purchasing and owning annuities. And I have visited people who wish they never got involved in an annuity.
Credit Scores = ROI Profits for Real Estate Investors
Strong credit saves real estate investors money on mortgage finance costs. A good credit score, along with the other credit and mortgage qualifications, means that investors can pay lower fees for financing, such as points and interest charges.
Margin Benefits are Marginal at Best
Margin is one of those things that novices find puzzling about the stock market, but the concept is really quite simple. Still, with understanding the basics of using margin accounts, determining the wisdom of using margin can be quite a conundrum.
The Biggest Oil Opportunity in the World - And How You Can Profit From It
Where is the second biggest deposit of oil reserves in the world?In the oil sands region of Alberta, Canada. Oil sands are a thick, viscid mixture of bitumen, sand, clay, and water.
Oil and Gasoline Price Uncertainties
The Light Crude Continuous Contract hit an all-time high at $70.85 a barrel, while Unleaded Gasoline Futures spiked 50% or $1 a gallon on Tuesday.
Why Do You Want to Become a Online Trader?
Motivational guru Tony Robbins teaches that the reason for doing something rates much higher than the methods you use to get the job done. In order to make your goal REAL, you need to attach severe, horrifying, intense and profound fear to failure.