he new tax law that resolved the “fiscal cliff” issue in January allows employees with a 401(k) plan at work to roll over any or all of the assets in their current plan into a Roth 401(k) plan. This is a big change, and should at least be considered by anyone who is eligible.
In a traditional IRA or 401(k) plan, employees contribute pre-tax earnings to the plan. The assets grow tax-free until retirement age, at which point the employee can withdraw them and pay ordinary income tax on the withdrawals.
With the new law, it’s likely that many more employers will begin to offer Roth 401(k)s as a result of employee demand.
With a Roth IRA, though, employees contribute post-tax earnings to the account, but when they withdraw the assets years later, the withdrawals are tax-free.
The new Roth 401(k) plans follow the same idea – earnings are contributed post-tax, but withdrawals are tax-free. [Read more...]