Roth 401(k)

In 2006, Congress merged two of the most popular types of retirement savings plans—the Roth IRA and the 401(k)—into a Roth 401(k). Investors don’t have to worry about income limits and they can still receive similar tax treatment as the Roth IRA. The Roth 401(k) allows participants to put some of their wages into a 401(k) plan as Roth contributions. Upon distribution, these result in tax treatment similar to distribution from Roth IRAs.

Why Should I Open a Roth 401(k)?

This plan is available to anyone with a 401(k). It's a benefit 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.

Eligibility

The main requirement is earned income as an employee. Employees can contribute funds on a post-tax elective deferral basis or as pre-tax deferrals under their traditional 401(k) plans. The annual contribution limit cannot exceed $15,500 for 2008 (investors who are over 50 may contribute an additional $5,000). In 2009, the annual contribution limit cannot exceed $16,500 (investors over 50 may contribute an additional $5,500)

Note that contributions in the Roth 401(k) are not subject to adjusted gross income (AGI) limits like the Roth IRA.