Napier & Company, LCC

The Roth 401k is another choice for 401k plans. It allows participants to defer after-tax salary dollars, the opposite of traditional 401k salary deferrals, which have been on a pre-tax basis. These contributions will be subject to the same rules as Roth IRAs. The Roth 401k is an optional feature that employers can add to a plan, but employers are not required to do so.

Roth 401k money is “after-tax” money and, like a traditional IRA, earnings within the account are not taxed each year. However, Roth 401k withdrawals are not subject to ordinary income-tax. This means that if you follow all of the IRS rules, the money you take out of a Roth 401k at retirement is tax-free!

The contribution limits for Roth 401k dollars will be the same as those for traditional 401k contributions. In 2006, the maximum salary deferral limit is $15,000, with an additional $5,000 catch-up provision available to those over age 50.

If their plan allows it, employees may be able to mix how a plan characterizes salary deferrals. For example, an employee could have 60% of his salary deferral to be Roth 401k money, and the rest to be pre-tax money.

The Roth 401k is only available for employee deferrals; employer contributions, profit sharing, etc. will not be part of a Roth 401k. Plans may begin deferring after-tax dollars to a Roth 401k January 1, 2006.