Many companies offer their employees the option to contribute money to employer-sponsored retirement plans. One such plan is the Roth 401k. The Roth 401k plan offers the tax-sheltered growth that traditional 401ks do but instead of offering a tax deduction for contributions, earnings can be withdrawn tax-free. The tax benefits of a Roth 401k plan make it an attractive option for people who expect to fall in a higher tax bracket at retirement than the current year.
You may only contribute money to a Roth 401k plan if it is offered by your employer. The contributions made to your Roth 401k plan are deducted directly from your paycheck. The contributions do not decrease your taxable income. You must choose how to invest the money from the investment options offered by your company. Each plan offered adds to the expense for the company, so usually larger companies will provide more investment options.
The IRS limits the amount of money that can be contributed to a Roth 401k each year. The amount adjusts each year. For 2010, you can contribute up to $15,500 if you are under 50 or $22,000 if you are 50 or older. These limits are cumulative with traditional 401k plan contributions. For example, if you contribute $8,000 to a traditional 401k plan, the amount you can contribute to a Roth 401k plan is decreased by $8,000. Roth 401k plans allow your employer to make contributions to the account on your behalf. However, these matching contributions must be put into a traditional 401k account.
Unless you have a financial hardship, you cannot withdraw money from the account until you either turn 59 1/2 or leave employment after you turn 55. A financial hardship is one that imposes a significant financial burden that cannot be met from other sources. Early withdrawals are usually subject to a 10 percent early withdrawal penalty on the portion of the withdrawal that comes from earnings. Money that is withdrawn at retirement comes out completely tax free. When you reach age 70 1/2, you must start taking distributions from your Roth 401k. The size of the distribution depends on the amount of money the account is worth and your age.