The Roth 401(k) is an employer-sponsored retirement plan that allows you to save for your future after taxes are deducted. The money you put in a Roth 401(k) grows tax-deferred until you withdraw it at age 59 1/2. The benefits of a Roth 401(k) include lower tax rates and deferred taxes on earnings. If you plan on retiring early, a Roth 401(k) may be right for you.
While the tax deduction can be attractive, it can be a losing proposition for many people. The tax rates can change, and you may find yourself in a higher tax bracket in a few years. In such a case, it may be best to invest in a Roth 401(k) instead. Withdrawals will be tax-free if you are 59 1/2 and you have been contributing to your account for five years.
A Roth 401(k) has many benefits, but its major advantage is the tax advantage. Unlike a traditional 401(k), contributions to a Roth 401(k) are irrevocable and cannot be rolled over to a traditional IRA. However, if you are terminated from your job, you can roll your contributions to a Roth IRA account, which is tax-free. While the Roth 401(k) was originally set to sunset at the end of 2010, the Pension Protection Act of 2006 extended the program until at least 2022.
The value of a Roth 401(k) depends on the tax rate that the plan participant will experience at the time of distribution. However, it is important to remember that future tax rates may increase, and a person at the lowest marginal income tax rate may be subject to a higher marginal tax rate when they take distributions. Therefore, it is important to assess the risk versus reward before investing in a Roth 401(k).