I’ve recently heard about this modification to a regular 401k, and think i generally understand it, with one exception. If I work for an employer who matches some of my contributions, what are the tax implications of his matching. I’m getting at the age where I need to start my retirement fund, and want to make sure I have all the necessary information. So far, this is the only answer I haven;t been able to get an answer to.
Matching contributions from an employer go into a Traditional account, not a Roth. Only the employee’s contributions get the Roth treatment.
What iwakura43 said is correct as I just asked about this last week. The Roth is what you do with your own personal funds, but your employer’s will always go into a traditional.
A Roth IRA is non taxable from what I’ve been told.
Well, taxes are taken out before the money goes in, but it grows tax-free, so there are no taxes when you take it out.
The administrators of my company’s 401(k) plan were unable to answer the question in the OP when I asked it last year during our initial briefing on the new plan. I had to find the IRS regulation and send it to them.
Also, be sure to keep an eye on the matching. Since all of my match was going into a traditional account, I put a relatively large fraction of my contribution into the Roth account. For the first six weeks (until I got my first statement and caught it), they were matching only the amount that went into the traditional account, not the Roth, so I wasn’t getting my full matching funds. I raised holy hell and they retroactively credited the account.
This is a big simplification. You should talk to a financial planner or find out if your employer offers retirement planning to advise you for your particular situation.
Roth IRAs have nothing to do with 401k, 403b, or other employee tax-deferred compensation plans. The main difference is when you pay the tax.
When you contribute to a Roth IRA you use your own funds (post income tax) to make contributions toward your retirement but your earnings from your investments are not taxed. You can only contribute $4000 per year (in 2006) to a Roth IRA, but when you contribute to this type of IRA when you are relatively young, the money can potentially grow for many years, and these earnings generally aren’t taxed by the Feds.
With a 401K, you can contribute pre-tax money, but you will eventually pay tax on the money you earn from your investments when you receive distributions. The positive here is that you reduce your taxable income and your employer may contribute a certain percentage as an enticement for you to save.
Your individual situation may vary, but in my experience, it is best to take advantage of any employer matched contributions to 401K as long as you can still maximize your yearly Roth contribution. If that will be a stretch for you, note that you can make your Roth contribution for the previous tax year as late as the filing date. This may help, for example, if you know you will be getting a big raise or promotion.
Ouch. Thanks for the heads up Parental Advisory.