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Article Teaser: Under this year's new tax rules it's possible to have a Roth 401(k) in addition to a Roth IRA for Tax Free Retirement Income.

Keep reading below...

Tax Free Retirement Income with the Roth IRA and Roth 401(k)

Copyright (c) 2006-2017

Under this year's new tax rules it's possible to have a Roth 401(k) in addition to a Roth IRA for Tax Free Retirement Income.

Unique to the Roth retirement accounts - Roth 401(k) and Roth IRA - participants save part of their salary on an after-tax basis and their money in the Roth accounts can grow and remain tax-free. That's right; the principal and accumulated earnings of a Roth account can be withdrawn tax-free, provided that certain qualifications are met. In contrast, contributions to a traditional IRA, 401(k), etc, are on a pre-tax basis but withdrawals of every dollar in the traditional accounts are taxed as ordinary income.

Most employees will have to wait awhile to participate in a Roth 401(k) because employers have been slow to make the necessary amendments so that their 401(k) can accept Roth contributions, according to a Hewitt Associates survey. But the self-employed, independent contractors and other business owners with no employees can get a Roth 401(k) as a feature in their Self-Employed 401(k) right away.

A Roth 401(k) is like the luxury version of the Roth IRA. For example, in 2006, the Roth 401(k) salary deferral limit is $15,000 vs. $4,000 for the Roth IRA, and the "catch up" for those 50 and older is $5,000 vs. $1,000 for the Roth IRA. Loans can be taken from a Roth 401(k) account, but not from a Roth IRA. And, unlike the Roth IRA high income earners are not restricted from having a Roth 401(k).

401(k) contributions can be split between the pre-tax account and the Roth after-tax account. However, the aggregate contributions must not exceed the elective deferral limit. Profit sharing or employer contributions must be made on a pre-tax basis.

The Roth 401(k) feature would probably appeal most to:

  • Individuals who think that their tax rate may be higher when they are ready to retire.

  • Long term investors that have the potential to accumulate considerable compounded earnings in their account over time and never want to pay tax on those gains.

  • Those concerned with passing some their retirement funds tax-free to their beneficiaries.

  • High income earners who do not qualify for the Roth IRA.


    The Roth feature of the Self-Employed 401(k) is valuable tool which allows the small business owner to tailor his investment strategy. The Self-Employed 401(k) can be started by any business that employs only owners, or owners and their spouses, including C corp, S corp, partnerships, and even sole proprietors working from home.

    Given the complexities of tax rules before reaching a conclusion one should contact his tax advisor regarding his specific legal, investment or tax situation.


    About The Author: Shop Amazon - Top Gift Ideas
    One can visit http://www.investsafe.com to request a free information kit on the Self-Employed 401(k) with the Roth and loan features.

    Daniel Lamaute
    Retirement Plan Specialist
    Lamaute Capital, Inc.
    http://www.InvestSafe.com

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    Internal ID: #3609
    Article Statistics
    Word Count: 435

    Total Views: 3246

    Article Rating: 2.56 of 5
    Votes Cast: 9

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