You may have heard about the Roth 401(k) and the Roth IRA and wondered, what is the difference and why is this guy Roth putting his name on everything? To be fair, the guy Roth was Former Sen. William V. Roth Jr. (he passed away in late 2007) and he was the man most responsible for the original Roth IRA. The Roth 401(k) was merely taking the Roth IRA and applying it to the 401(k), thus creating a regular/traditional 401(k) and a new Roth 401(k).
The Roth 401(k) works like the Roth IRA, your contributions are post-tax and your disbursements are tax free. You can take early payments but you pay taxes on the proportion of the withdrawal that is “appreciation” equal to 10% plus your marginal tax rate.
The contribution limit is $15,500 for those under 50, with an additional $5,000 catch-up addition for those over 50, in 2008. This contribution limit is shared between the regular 401(k) and the Roth 401(k), which means the sum total of contributions to both plans cannot exceed the annual limit of $15,500 or $20,500. Another wrinkle to the rule, that is often never an issue, is that the sum of employee and employer contributions have to be less than the employee’s total salary or $46,000, which ever is smaller. (another wrinkle is that employer contributions are pre-tax, so they sit in the traditional 401(k))
When you leave your employer, you can roll over your Roth 401(k) into a Roth IRA just as you would a 401(k) into a Traditional IRA.
Of my two former employers, only one had instituted the Roth 401(k) so adoption has been slow. Most employers don’t want the added administrative burden of operating yet another defined contribution plan.