What is a Roth 401k contribution?

[BuckyBadger]

So was feeling pretty good about my understanding of retirement accounts -- I'd figured out the 401k (403b for me) and finally I understood the difference between the different kinds of IRS (Roth, traditional, non deductible).

But now I am confused!

I recently reread my benefits package and they mention something about Roth contributions.

Through the Incentive Savings Plan, you
may save money on a before-tax basis,
an after-tax basis (Roth account), or
some combination of the two options.
Money saved on a before-tax basis
lowers the amount of taxes you pay
today. You do not pay taxes (other than
FICA taxes on your contributions) on
before-tax savings or any corresponding
investment earnings until you withdraw
those savings from your account. The
advantage of saving money on an aftertax
basis through the Roth account is
that, although your contributions are
taxable when made, you do not pay any
taxes on the investment earnings
allocated to those after-tax contributions
when they are withdrawn, provided the
withdrawal occurs after you are age 59-
1/2 and at least 5 years after you first
saved money on an after-tax basis
through the Roth account.

Employee contributions may be made to
the plan as before-tax contributions,
after-tax Roth contributions, or some
combination of the two. Before-tax
contributions and after-tax Roth
contributions are held in separate subaccounts.
• Before-tax contributions are
made on a before-tax basis. You
do not pay current federal income
tax (other than FICA taxes) on
before-tax contributions, but
those contributions (as adjusted
for gains and losses) are taxed
as income when you withdraw
them from the Plan, unless you
make a tax-free rollover (as
described under “Tax-Free
Rollovers”).
• Roth contributions are made on
an after-tax basis. The
advantage of Roth contributions
is that distributions of your Roth
contributions and all earnings on
those contributions are generally
tax free provided you are at least
59-1/2 and those distributions
occur at least 5 years after you
made your first Roth contribution
to the Plan (as described under
“Distributions from Roth
Account”).

It does mention the same 16,500 limit with which I am familiar, though.

Your employee contributions to the Plan
may not exceed $16,500 in 2011,
except as allowed for catch-up
contributions for employees age 50 or
older as described below. The IRS will
increase this $16,500 limit for cost of
living adjustments in future years. If you
contribute to any other 403(b) or 401(k)
plans, this limit applies to your total
contributions to this Plan and to the
other plans for each year.

So I'm not sure what they mean. Does that mean that if I wanted to I could put $16,500 of after-tax dollars into the account and never have to pay taxes on it? Considering the $5k limit on Roth IRAs, I can't imagine the government would let me do that, but who knows. I'm in a very high tax bracket right now, so conventional wisdom would say I should put away pre-tax dollars, but I'm still wondering what this is. Does it sound familiar to anyone? Has anyone heard of it before?

[thefrugaltoad]

A Roth IRA is different from a 401k in that contributions to a Roth are after-tax dollars whereas in a 401k contributions are pre-tax. In other words, you will pay income taxes on Roth contributions. The main advantage of a Roth for younger savers is that once you reach age 59 1/2 your withdrawals are tax free. You will need do run an analysis before you convert a 401k to a Roth. Google Roth Conversion calculator and plug in the numbers.

Hope this helps. The Frugal Toad

[BuckyBadger]

Thanks, Toad.

I googled it, too.

Roth 401(k) - Wikipedia, the free encyclopedia

[bjl584]

Roth 401K is an account through an employer. The money is taken out AFTER tax, as opposed to a traditional 401K that withdraws the money PRE tax thereby lowering your tax exposer. Same rules apply for each so far as contribution limits.

[BuckyBadger]

I posted a thread in Personal Finance asking for opinions on making Roth contributions. I thought I should make a different thread because I wanted to add in more pertinent information. Please go there to comment!