Here’s a look at the facts about the Roth 401(k) |

Here’s a look at the facts about the Roth 401(k)

William Creekbaum
For the Appeal

Now that PPA 2006 has made the Roth 401(k) a permanent tool in the arsenal of retirement planning options, many more employers may offer these new accounts in addition to their traditional 401(k) plans.

As the name implies, the Roth 401(k) combines features available with Roth IRAs with those available with traditional 401(k) plans. Before you make a decision on this or any other retirement option, here are a few things you should know.

A traditional 401(k) plan must be amended to allow explicitly for designated Roth 401(k) contributions. The plan participants have to make an election for the contribution to be treated as a contribution to the Roth 401(k). The Roth 401(k) contributions and earnings must be maintained in a separate account from traditional 401(k) contributions and earnings. Forfeitures cannot be allocated to a Roth 401(k) account.

While contributions to a traditional 401(k) plan are made with pretax dollars, contributions to a Roth 401(k) plan are made with after-tax dollars, so there are no tax deductions when the contribution is made.

Similar to a Roth IRA, the assets in the Roth 401(k) will grow tax-free. Withdrawals can be made after the account holder turns 59 and, as long as the money was held in the account for five years, the distributions including earnings will be tax- and penalty-free.

The maximum contribution to a Roth 401(k) plan is the same as allowed in a traditional 401(k). For example, in 2007, the maximum contribution is $15,500. If an employee wants to contribute to a Roth 401(k) plan and a Traditional 401(k) plan, the maximum combined contribution between all traditional and Roth 401(k) accounts cannot exceed $15,500. There is no provision for company matches of Roth 401(k) contributions. Any company contributions will continue to go into the employee’s traditional 401(k) account and will be treated as pretax contributions.

There are no income limitations on the Roth 401(k), unlike Roth IRAs where single individuals with more than $114,000 in adjusted gross income (and married couples who have more than $166,000 in adjusted gross income) are ineligible for contributions.

With a Roth IRA, an account holder is not subject to Required Minimum Distributions (RMD).

However, with a Roth 401(k), there are RMD requirements from the account once the account holder turns 70. Under the regulations, the RMD requirement could be avoided by rolling the Roth 401(k) into a Roth IRA when a plan participant separates from service.

The rules don’t allow traditional 401(k) plans to be converted to Roth 401(k) plans.

Plan participants age 50 and over may make $20,500 in Roth contributions to their Roth 401(k) in 2007 ($15,500 regular contribution and a $5,000 catch-up contribution).

The Roth 401(k) plan offers employees a new alternative in saving for retirement. It allows individuals, regardless of their income level, to take advantage of the tax-free benefits in their retirement savings account.

However, the decision to make contributions to a Roth 401(k) rather than a traditional 401(k) plan should only be made after a thorough analysis of the tax consequences is completed.

For more information, e-mail or call 689-8700.

Smith Barney does not provide tax and/or legal advice. Please consult your tax and/or legal advisors for such advice.

• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of SmithBarney, a financial services firm serving Northern Nevada at 6005 Plumas Street, Ste. 200 Reno, NV 89509.