The best magazine
- The Roth 401(k) plan works under the same concept as the popular Roth IRA. Both plans allow workers to put aside after-tax dollars and get tax-free withdrawals down the line. If your employer offers this option, you can use it to fund your 401(k) with after-tax instead of pretax dollars.
- Not all employers offer the Roth option for their 401(k) plans, so you will have to check with your human resources department to see if an after-tax option is available. If your employer does offer a Roth 401(k) plan option, you can sign up for it the same way you would sign up for a traditional 401(k). If you like, you can contribute some money to the Roth 401(k) plan and some to the regular pretax version.
- You can contribute to a traditional pretax 401(k) and an after-tax Roth 401(k) in the same year, but you are still subject to the same contribution limits. The combined amount of your after-tax and pretax 401(k) contributions, as of August 2011, cannot exceed $16,500 for regular contributions plus a catch-up contribution of $5,500 for workers who are 50 years of age and older. Your employer should keep track of your 401(k) contributions and automatically stop them once you reach the annual limitation.
- One of the potential advantages of an after-tax 401(k) is the long-term tax treatment. When you contribute money to a traditional 401(k), you get an immediate tax break through lower taxable income and lower tax withholding. The trade-off is that you must pay taxes on withdrawals at your ordinary income tax rate. With an after-tax Roth 401(k), you give up that immediate tax break, but in exchange you can withdraw the money without paying any federal income taxes.
Roth 401(k)
Your Employer
Contribution Limits
Tax Treatment
Source: ...