A Tax Shelter from the Roth 401(k)?

Many traders have a new retirement savings choice: the Roth 401(k). Plus it might possibly be considered a large boon to those individuals who're approaching retirement and wish to save much more and enjoy a tax shelter.

To begin with, the Roth 401(k) isn't for everybody. If you're in retirement, it is not available to you, because just like the traditional 401(k), the Roth 401(k) is offered by employers. However for people who're still working, the Roth 401(k) might be considered a practical investment choice.

Just like it sounds, the Roth 401(k) combines features of the Roth Individual Retirement Arrangement (IRA) and the traditional 401(k). As with a Roth IRA, you receive a tax shelter:

contributions to a Roth 401(k) are made on an after-tax basis (i.e. no tax shelter at time of contribution);
the account grows tax-free;
withdrawals are not subject to income tax (provided you have held the account for five years or even more, and the distribution is made after you attain age 59½, if you end up being handicapped, or if you die).

But just like a 401(k), you might contribute to a Roth 401(k) no matter your income, and its contribution limits are the same as the traditional 401(k), which in 2012 is $17,000-or $22,500 for those 50 or older.

What that means: If you are attempting to stash as much as possible into your retirement accounts, the Roth 401(k) might potentially become a great chance for a tax shelter, according to your other economic conditions.

Before you call your employer, although, you may want to concentrate on 2 things. First, the contribution limit applies to contributions to both types of 401(k) plans, so that you can only conserve a total of $17,000 in your traditional 401(k) and Roth 401(k) combined. However, you may use both plans, contributing, for instance, $8500 to each. Furthermore, your employer might not yet offer the Roth 401k so as to enjoy the tax shelter described.

So who might select the Roth 401(k) over the traditional 401(k)? That is a personal decision which you need to discuss with someone familiar with your individual financial circumstances and goals, such as your economic or tax expert. But in general, in the event you expect your income tax rates to be exactly the same or higher in retirement than it's now, you should choose a Roth 401(k). Or, in the event you believe your tax bracket will be lower in retirement than it is now, you may choose a conventional 401(k).