NCPA - National Center for Policy Analysis


March 28, 2005

Taxpayers who've wanted to open a Roth IRA but couldn't because they make too much money can take heart. Starting next year, employers will be able to add a new Roth 401(k) to their menu of retirement plans. Think of it as a cross between the Roth IRA and a traditional 401(k), says business reporter Pamela Yip.

Although the Roth 401(k) and Roth IRA are similar, the Internal Revenue Service is still working on guidelines:

  • Whereas the maximum amount you may contribute each year to a Roth IRA phases out (between $95,000 to $110,000 for single taxpayers and $150,000 to $160,000 for joint filers), there are no such limits for a Roth 401(k).
  • The only time the Roth 401(k) explicitly picks up the rules from the Roth IRA is when it comes to taking money out of the account.

A Roth 401(k) might be attractive for anyone in the early stages of their career and in a lower tax bracket now, but who will make more money later, says Lori Lucas, director of retirement plan participant research at Hewitt Associates in Lincolnshire, Ill., an employee benefits consulting firm. That is because you get earnings tax free, and you pay taxes on your contributions at the low rate when you're younger.

Source: Pamela Yip, "401(k) plan will come in 2 styles: You can mix regular, Roth to suit your investment strategy," Dallas Morning News, March 27, 2005.


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