Monday, April 02, 2007

Financial Planning 101: 401(k) vs. Roth 401 (k)

More and more employers are offering workers the option to save for retirement using a Roth 401(k), a hybrid between a regular 401(k) plan and a Roth IRA. Made permanent by Congress in 2006, the Roth 401(k) allows employees to make contributions with after-tax dollars. There's no tax deduction upfront, but the account grows tax-free.

The payoff comes when it's time to use the money: The employee can make withdrawals during retirement tax-free, as long as he or she is 591/2 and has held the account for five years or more. In most cases, the Roth 401(k) gets you a better deal than a traditional 401(k).

What's more, you can put more away with a Roth 401(k) than you can with a Roth IRA. (The 2007 contribution limit for the Roth 401(k) is $15,500, $20,500 for those 50 or older by the end of the year. Compare that with the 2007 Roth IRA limits, which are $4,000 a year or $5,000 for those 50 or older.)

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