Understanding Roth 401K Accounts

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August 14, 2013 — 2,530 views  
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Savings and understanding how the various available saving plans work will go a long way into helping you enjoy a stress-free retirement life. Roth 401 accounts are a retirement savings plan that the government of the United States authorized and is primarily a coagulation of the Roth IRA plan and the 401(k) plan. However, there happen to be a number of people that are significantly confused about the benefits of Roth 401(k) accounts in relation to the traditional 401(k) accounts.

Taxable Amounts

One of the biggest pieces of confusion regarding the Roth 401(k) accounts revolves around the amount that is taxed. While both plans will eventually see the monies in them taxed, the benefits lie in exactly how they are taxed. As with any kind of retirement savings plan that is built on employee contributions, choosing the right one is purely a judgment call that must be based on your own preferences and how you see your retirement years panning out. While the traditional 401(k) accounts will seem to make sense because of the fact that the monies are taxed only in the year of their disbursement, the money collected in Roth 401(k) accounts will be taxed from the time they are put into the account.

While it may seem sensible, and even appear profitable, to stave off the taxation until later, you never know how much the tax slabs will rise to in the future. This means it could be safer to lock in your retirement funds to the current tax slab in order to save money. Again, a major part of the decision will lie on exactly how you see yourself spending most of your retirement days.

Withdrawing Without a Penalty

A number of people are of the opinion that you can withdraw any amount of money that has been stored in Roth 401(k) accounts without incurring any penalties. The fact is that there actually are early withdrawal penalty fees in both – the traditional 401(k) plans as well as the Roth 401(k) plans. The only real difference when it comes to early withdrawal is the fact that by performing an early withdrawal on Roth 401(k) accounts you will not be taxed on the withdrawn funds as you have already paid taxes on this amount.

No Employer Match

Another aspect of the Roth 401(k) accounts that is misunderstood is the belief that there is no employer match under the scheme. This is not completely true because of the fact that the scheme stipulates that the employer may choose to and will be allowed to contribute a matched or percentile amount toward your account. However, there is no law stipulating that the employer will have to perform this.

Some of the other common misunderstandings about Roth 401(k) accounts include issues such as the fees for the plan being excessive, even though there are flat-fee plans that have also been set-up to benefit the small businesses, as opposed to the much larger fees that are designed to cater to the big conglomerates. There are also maximum pre-tax contribution limits set on an annual basis for the 401(k) contributions. You will need to consult your financial advisor with regards to your own limit as it is built to give greater benefit for certain income brackets.

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