Now Every American Can Enjoy Roth Benefits

New Roth 401(k) Allows Contributions Up to $20,500 with NO Income Limits

"I make too much money to qualify for a Roth IRA."

Not at Equity Trust.

Congress has merged two of the most popular types of retirement savings plans--the Roth IRA and the 401(k), into a Roth 401(k)--and it's now available at Equity Trust. No longer worry about income limits and still receive similar tax treatment to the Roth IRA.

The Roth 401(k) allows you to put some of your wages into a 401(k)/Solo 401(k) plan as Roth contributions that, upon distribution, will result in tax treatment similar to distributions from Roth IRAs. This new plan is available to anyone with a 401(k) or Solo 401(k). It's a boon to higher-paid employees and self-employed individuals (e.g., real estate investors) who may have been excluded from having a Roth IRA account because of income limitations.

The Roth 401(k) is now available at Equity Trust. Please call your First Class Service Team or 1-888-ETC-IRAS (382-4727) to learn more.

You may wonder, "What exactly are the advantages of the Roth 401(k)? Why all the hype?" To better understand the appeal of the Roth 401(k), let's first review the regular 401(k)/Solo 401(k) and the Roth IRA.

Background: The Tax-Deferred 401(k)/Solo 401(k)

You receive deductions going in, and you pay taxes when you withdraw funds

The 401(k) or Solo 401(k)--for self-employed people, like real estate investors--is generally thought to be a good choice for those who want to contribute more to a retirement account than an IRA will permit. Employees may contribute up to $15,500 for 2008 through salary deferrals, although this may not exceed 100% of pay. Under a “catch-up” provision, individuals age 50 and over may contribute an additional $5,000 in salary deferrals beyond the $15,500. These contributions are tax deferred--you can take a deduction on those funds for the tax year in which they were contributed.

In addition to this amount, the employer--or business owner, in the case of a Solo 401(k)-- may also match these contributions, with a total combined contribution limit of $46,000 for 2008. Your own contributions are immediately "vested" --they're yours to keep under any circumstance. Employer contributions can vest immediately or over a period as long as six years.

No withdrawals (with the exception of hardship withdrawals) are allowed before age 59½ while you're employed. If you leave your employer before age 55, withdrawals may be taxed and hit with a 10% penalty--unless they're rolled over into an IRA or another 401(k).

You must begin to take distributions from your 401(k) or Solo 401(k) by April 1 of the year after you turn 70½ or when you retire, whichever is later. These distributions are taxed, because your contributions to the plan were tax deferred.

Read more about the Solo 401(k) here.

Background: Roth IRA

No deductions going in, but all profits are TAX FREE going out

Contributions to a Roth IRA are not tax deductible, but distributions are tax free upon retirement. This is especially appealing to investors who expect to earn above-average rates on investments within their IRAs, because the earnings on these investments will be tax free.

The downside to the Roth IRA is that not all Americans qualify for one. If you currently earn more than $116,000 as a single tax payer or $169,000 filing jointly, you don't qualify to open this type of account. This is not true with the Roth 401(k)! Anyone can contribute, regardless of income.

In addition to qualifying restrictions, the Roth IRA contributions are low – only $5,000 in 2008, with a $1,000 additional catch-up contribution for those age 50 or over - when compared to the 401(k).

There are no age restrictions with the Roth IRA. Account owners may continue to make contributions to, and need not take distributions from, the accounts when they reach age 70½.

When account owners are ready to take distributions, they may do so tax free, as long as the account has been open for five years and they are age 59½ or over.

Read more about the Roth IRA here .

New Roth 401(k)

Allows greater “Roth” type contributions for EVERYONE, with no income limits

401(k) and Solo 401(k) plans now allow employees to make their contributions as Roth contributions. These Roth contributions are tax free upon distribution, and any investment earnings in the account compound tax free as well. Also, unlike the Roth IRA, Roth 401(k) contributions are allowable regardless of income level. This permits many taxpayers who wouldn't otherwise be eligible to participate in a Roth account.

You can now contribute up to $46,000 to your 401(k) or Solo 401(k), with up to $20,500 as Roth contributions!

Like the regular 401(k) or Solo 401(k), the maximum employee contribution to a Roth 401(k) is $15,500 for 2008, plus another $5,000 in catch-up contributions if the participant reaches age 50 or over in that year.

Note: when an employer--or, in the case of the Solo 401(k), the business owner-- makes a matching contribution to the employee's plan, those funds cannot be contributed to the Roth portion of the account. Only the employee's after-tax contributions and the related earnings on those contributions are permitted in the Roth 401(k). Any employer-matching funds must be contributed to the participant's standard 401(k) account. Employer matches are still made with pre-tax dollars, and the matching funds accumulate in a separate account that's taxed as ordinary income at withdrawal. And, like the regular 401(k) or Solo 401(k), the total maximum contribution from both sources is $5,000 in 2008.

Real life example: John is a self-employed real estate investor and has a Solo 401(k) plan to which he contributes each year. He set up his plan to allow Roth contributions, in addition to his regular Solo 401(k) contributions, beginning in January of 2008. John's compensation as an “employee” of his company is $100,000 in 2008. When making his deferral elections, John wants to make the most of his opportunity to make Roth contributions, so he decides to defer 1% of his pay ($1,000) as standard Solo 401(k) contributions, with an additional 14% ($14,000) as a designated Roth contribution. He may do this, because his combined contributions do not exceed the IRS limit of $15,500 for the 2008 tax year.

Then, putting on his “business owner” hat, John decides to match 100% of his combined contributions, or $15,000. He may do this because the total match is less than 20% of his earnings-- 20%is the maximum amount that may be matched under a Solo 401(k) plan. According to IRS regulations, all matched funds must be made to John's regular tax-deferred account.

The total amount contributed to John's Solo 401(k) in 2008 is:

$ 1,000 - “Employee” regular tax-deferred contribution to his Solo 401(k)

$14,000 - “Employee” tax-free Roth contributions to his Solo 401(k)

$15,000 - “Employer” match, placed in regular tax-deferred Solo 401(k) account

$30,000 - TOTAL CONTRIBUTIONS

Roth 401(k) Rules Similar To Those Of The Roth IRA

The Roth 401(k) rules are similar to those for the Roth IRA, but there are some important differences. In a Roth 401(k), income taxes are paid at the time of contribution.

5 Years and Age 59½ -- this is all you need for tax-free income for life! Earnings and withdrawals are not taxed if (1) withdrawals begin after age 59½ and (2) if at least five years have elapsed from the date of the first contribution to the plan. Taxes and penalties are waived if a participant dies or is disabled.

Roll over to a Roth IRA to avoid taking distributions at 70½! As in a 401(k), Roth 401(k) participants must take minimum distributions (tax free, of course) beginning the year after they turn 70½. However, the Roth 401(k) can be rolled into a Roth IRA, so the participant doesn't have to take these minimum distributions.

Take Advantage of the Roth 401(k) Now...It Might Not Last

Roth 401(k) plans are scheduled to expire at the end of 2010. It is possible that after 2010, previous Roth contributions could remain in the plan, but no new Roth contributions can be made after that time. Congress may, of course, extend these provisions before this occurs. If the Roth 401(k) becomes popular, this seems a likely prospect.

Roth 401(k) Highlights

1. Higher contribution limits - Roth 401(k) participants may make the maximum contribution allowable under 401(k) rules. The 2008 401(k)/Solo 401(k) contribution limits allow employees under age 50 to set aside up to $15,500, or 20,500 for employees age 50 or older. For those who want to save aftertax money, this is a much quicker route than saving in the Roth IRA, which has contribution limits of $5,000 for those under age 50 and $6,000 for those age 50 and above in 2008. As an added benefit, Roth 401(k) participants may still have contribute the maximum allowable amount to a Roth IRA in addition to their Roth 401(k) contributions.
2. Tax benefits - Roth contributions may be withdrawn tax free and penalty free as long as the participant is at least 59½ years of age and has held the account for at least five years.
3. Easier participant qualification – Everyone qualifies! The Roth 401(k) is open to anyone who has a regular 401(k) or Solo 401(k). This is a boon to higher-paid employees who may be excluded from having a Roth IRA because of its income limitations.
4. Solo/Individual 401(k) participants can modify their plans to include Roth contributions. Previously established 401(k) or Solo 401(k) plans can easily be modified to allow for Roth contributions.
5. Contributions are irrevocable - Once the money goes into the account, it falls under all IRS rules and penalties for 401(k)/Solo 401(k) accounts. Participants may not later change their minds and move the funds into their regular tax-deferred accounts.
6. Distribution requirements - The Roth 401(k) has the same distribution requirements as the 401(k) or Solo 401(k). Participants must begin taking minimum distributions by age 70½. This contrasts with the Roth IRA, which has no distribution requirements. Account holders can get around this distribution requirement by rolling over their accouns into a Roth IRAs.
7. Rollover options - Participants can roll over Roth 401(k) contributions to Roth IRAs upon retirement or termination of employment.

Getting Started

The Roth 401(k) is available now. Call Equity Trust today at 888-ETC-IRAS (382-4727).

Disclaimer: Equity Trust is a passive custodian and does not provide tax, legal, or investment advice. It does not endorse or recommend any contributor, company, or specific investments. Any information communicated by Equity Trust Company is for educational purposes only and should not be construed as tax, legal, or investment advice. Whenever making an investment decision, please consult with your legal, tax, and accounting professionals.