Roth 401K

Your employer may allow you to make Roth 401K contributions as well as regular 401K contributions. If you do decide to make Roth 401K contributions, then they are made with after tax money not pre-tax. You can contribute to the Roth 401K and the 401K if you like in the same year but they will be in separate accounts.

The combined amount contributed to all designated Roth accounts and traditional, pre-tax accounts in any one year for any individual is limited. The limit is $16,500 for 2009 plus an additional $5,500 in catch-up contributions in 2009 if the employee is age 50 or older at the end of the year. These limits may be increased for 2010.

Why would you contribute to a Roth 401K? If a large percentage of your investments are in tax deferred accounts, you run the risk of having all of your retirement income being fully taxable. That means your social security income could also be taxed. That’s a painful chunk of retirement money going to taxes.

With a Roth 401K, you have the ability to build up funds on an after tax basis (but still get the tax deferred growth) and then you can take the money out tax -free. Woo-Hoo!