Understanding the Roth 401(k)

July 12, 2012 Updated: July 16, 2012

As the name itself suggests, the Roth 401(k) is a fusion of features from the traditional 401(k) retirement savings plan and the Roth IRA (individual retirement arrangement).

While employers offer them like a regular 401(k) plan, contributions are made in after-tax dollars. Put more simply, when you are making the contribution to your retirement plan, your taxes would not be as low as they otherwise would be had you contributed to a regular 401(k) plan.

As a result, the account grows tax-free, with withdrawals following retirement not subject to income tax, provided that the retiree is at least 59.5 years old and has had the account for at least five years.

However, this plan can be particularly powerful if you plan on leaving retirement assets to your heirs and have them take advantage of an inherited IRA. It could also be quite effective in maximizing Social Security benefits.

The Roth 401(k) can also offer advantages to high-income individuals who have not been able to contribute to a Roth IRA due to the income restrictions. Roth 401(k)s have no income restrictions placed on them.

The Epoch Times publishes in 35 countries and in 19 languages. Subscribe to our e-newsletter.