401(k)
vs. ROTH 401(k)?
The
401(k) plan has truly become the
staple for retirement in the U.S. Just
20 years ago many financial experts thought it would
fade away quickly but today you wouldn't think about
taking a job that didn't offer one, right? It can be
a sensational vehicle for tax-free wealth building if
used properly. Particularly if you have a self-directed
401(k). It is also important to note that these guidelines
also apply to the 403(b) plan.
Well,
in January 2006 congress and the IRS made some changes
to allow for many of the benefits of the Roth IRA to
apply to the 401(k) plan in the form of a Roth 401(k).
Knowing the difference is vital to your ability to build
long-term tax-free
wealth.
Some
assets in 401(k) plans are tax deferred. Before the
January 1, 2006, effective date of the designated Roth
account provisions, all 401(k) contributions were on
a pre-tax basis (i.e., no income tax is withheld on
the income in the year it is contributed), and the contributions
and growth on them are not taxed until the money is
withdrawn. With the enactment of the Roth provisions,
participants in 401(k) plans that have the proper amendments
can allocate some or all of their contributions to a
separate designated Roth account, commonly known as
a Roth 401(k). Qualified distributions from a designated
Roth account are tax free, while contributions to them
are on an after-tax basis. In addition to Roth and pre-tax
contributions, some participants may have after-tax
contributions in their 401(k) accounts. The after-tax
contributions are treated as after-tax basis and may
be withdrawn without tax. The growth on after-tax amounts
not in a designated Roth account are taxed as ordinary
income. Talk to your accountant for more details.
With
only a few minor distinctions, the differences between
the 401(k) and the Roth 401(k) are nearly identical
to the differences between the IRA and the Roth IRA.
For more info on traditional retirement accounts versus
Roth account read our articles on the differences between
IRA vs. Roth IRA.
We think it'll be very informative. Enjoy!
DISCLAIMER:
WN Funding or its affiliates hold
no licenses for financial planning and WN Funding is
not a registered security with the Securities &
Exchange Commission.
None of the information on this website should be
viewed as tax or legal advice. Please be sure to consult
your attorney, accountant, and/or other licensed professional
needed before considering any investment or conversion.
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