Roth Options on Your 401k

One of the big advantages a Roth IRA used to have over a 401k involved the tax benefits. True, a Roth IRA does not offer pre-tax contributions. But it does offer tax-free earnings growth and tax-free withdrawal once you hit age 59.5. But now, thanks to last year's changes in tax law and in savings law, you can get Roth benefits on a 401k. You can have your cake and eat it too.

Advantages Roth 401k

There are several advantages to the Roth 401k. Honestly, you will be better off paying taxes on your earnings before you put them into the Roth 401k. After all, when you withdraw from a regular 401k or a regular IRA, you end up having to pay income tax on that money. Think of the benefits of your retirement account accumulating money tax free until you retire. Plus, it is worth mentioning that even though your contributions are not tax deductible, you are still eligible for a tax credit in the category of retirement savings contributions.

Another Roth 401k advantage puts it above a Roth IRA. The Roth IRA can be somewhat maddening, in that there are some income limitations. If you make too much, the you can't contribute to a Roth IRA. With a Roth 401k, however, there are no income limits. Congress actually made it easier for you to save your money better.

Roth 401k caveats

There are, of course, some caveats associated with the Roth 401k. The main caveat is that, like the 401k, you need to be employed. You can only take advantage of this great option if your employer allows it. You might want to check with your employer to see if it is possible to upgrade the company 401k retirement plan to a Roth 401k.

You should also understand that the tax situation can get sticky if you roll funds from another retirement account into a 401k. You may need professional guidance from a tax attorney to help you through the process.

And, finally, you should be aware that, like the traditional 401k, the Roth 401k comes with minimum distribution requirements, which a Roth IRA does not have. Therefore, to continue enjoying the tax-free growth of your Roth 401k, you might consider rolling it into a Roth IRA when you get to the required minimum distribution age.

The Roth 401k adds another option to your retirement planning. It is sound option -- one that combines characteristics of a 401k with those of a Roth IRA.