The Roth 401k: Another Great Investment Tax Shelter

By Larry Lane for InvestorZoo.com

Roth 401k saving plans were introduced as a new type of tax shelter in 2006. Unfortunately, employers have been slow to adopt the plan. It is estimated that only 33-40% of employers are making the Roth 401k option available to their employees.

The Roth 401k combines the features of a Roth IRA and 401k plans. The Roth 401k plan gives workers with earned income the ability to invest after tax money in a tax sheltered retirement vehicle. The money grows tax free until 59 �. You must start to make mandatory withdraws from your Roth 401k at age of 70.

Employees who have access to both account types can contribute to a standard 401k plan, divert their contributions to the Roth 401k or split their contributions.

In a 401lk plan, investment contributions are made with pre tax money and taxes upon withdraw after 59. Invest in a Roth 401lk and your money will come out tax free upon withdraw, however there are no upfront tax benefits. The Roth 401k gives you the ability to contribute up to $16,500 per year ($22,000 for those over for those 50 and older) and has no income limitations.

Who benefits from a Roth 401k?
The new 401k is ideal for high income workers since there are no income eligibility restrictions. By utilizing a Roth 401k, those that are highly paid can take advantage of the great tax benefits. You can withdraw a portion of their retirement income from a social security, tax free money from a Roth 401k and then lastly taxable income from an IRA or 401k.

A Roth 401k may be ideal for those who can afford to max out their account and is in a low tax bracket. If you are in a situation where you’re not getting any or little tax incentives, a Roth 401k may be ideal. Invest $15,500 in your account and watch it grow tax free until you’ve exhausted your other retirement accounts.

Do you believe you will be in a high tax bracket in retirement? You will however have to take out a crystal ball to determine if the US Government will reform the tax system and raise taxes. Given the state of the economy, I believe it is a given there will be big changes in our tax brackets shortly.

There are many tax shelters available to assist with your retirement nest egg. Please consult your financial planner or accountant to determine which investment vehicle is right for you.

Larry Lane is the editor for InvestorZoo.com, a social networking site dedicated to personal finance. Questions and comments can be directed to Larry.Lane@InvestorZoo.com

The above article is information of a general nature. Please see the advice of a licensed financial planner before making any financial decision.