FIRST-PERSON: Roth contributions: What’s all the buzz?

by Sherre Stephens, posted Thursday, August 24, 2006 (12 years ago)

DALLAS, Texas (BP)--Starting this year, your employer may add a 401(k) or 403(b) Roth contribution to its retirement plan, but is this option right for you? It depends. Consider the following key points.

-- Eligibility.

Roth IRAs are not available to higher income taxpayers; however, income limitations do not apply to 401(k) or 403(b) Roth contributions. If you are eligible to make elective deferrals, you are eligible to make Roth contributions.

-- Taxes.

Which is more valuable to you, paying taxes now or later? If you are in a very low tax bracket now and expect to be in a higher tax bracket in the future, or you have many years ahead to contribute and accumulate earnings, a 401(k) or 403(b) Roth contribution may be beneficial. Decades of compounding earnings can result in significant accumulations, and tax-free distributions can provide more purchasing power during retirement years.

-- Contribution limits.

The contribution limits for 401(k) or 403(b) Roth contributions are substantially higher than Roth IRA limits. For 2006, the Roth IRA limit is $4,000 ($5,000 if age 50 or older). That amount will rise to $5,000 in 2008, and continue to increase to keep pace with inflation. The 401(k) or 403(b) Roth contribution limit is the same as for elective deferrals (for 2006, $15,000 or $20,000 if age 50 or older). The $15,000/$20,000 limit applies to the sum of all elective deferrals and 401(k) or 403(b) Roth contributions.

-- Rollovers.

You can roll a 401(k) Roth account balance to another 401(k) Roth account or to a Roth IRA. Similarly, a 403(b) Roth account balance can be rolled to another 403(b) Roth account or to a Roth IRA. However, rollovers from a Roth IRA to a 401(k) or 403(b) Roth account are not permitted.

-- Qualified distributions.

The rules are more complex and restrictive for a 401(k) or 403(b) Roth account compared to a Roth IRA. Certain ordering rules apply and the five-year “clock” requirement is different.

-- Impact on Social Security benefits.

Tax-free distributions from your 401(k) or 403(b) Roth account do not impact the taxability of Social Security benefits.

Still uncertain? Perhaps a blend of elective deferrals and 401(k) or 403(b) Roth contributions would be a practical approach. Talk with your tax or financial advisor about what’s right for you.

A recent law change may make 401(k) or 403(b) Roth plans more plentiful. The Pension Protection Act of 2006, signed into law by President Bush on Aug. 17, 2006, makes the 401(k) or 403(b) Roth plans permanent. Originally, the accounts would have expired in 2010.


Sherre Stephens is a certified employee benefits specialist and director of executive and institutional benefit design for GuideStone Financial Resources of the Southern Baptist Convention.

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