text: The Roth 401K is a new retirement savings plan. It is authorized by Congress under the Internal Revenue Code, section 402A [[1]]. It represents a unique combination of the Roth IRA and a traditional 401K plan. As of January 1, 2006 US employers have been free to establish Roth 401k accounts for their employees.\n\nIn a traditional 401K plan, employees make "elective deferrals" and contribute earnings to their retirement plan, pre-tax. That is, an employee's elective deferral funds are set aside by the employer in a special account and the funds are invested. Typically, employers also add funds to the account by contributing matching funds on a fractional formula basis. E.g., matching funds might be added at the rate of 50% of employees' elective deferrals. Both the elective deferrals and the matching funds are invested and grow on a tax deferred basis. The invested funds are taxable at ordinary income tax rates when an account owner takes "qualified distributions", typically after having reached the age of 59.5.\n\nUnder a traditional Roth plan, first enacted in 1996, individuals, whether employees or self-employed, may contribute post-tax funds to an individual retirement account (IRA). The Roth IRA effectively reverses the order of the 401k and allows for post-tax contributions, but tax free growth and qualified distributions, if the contributions have been invested for at least 5 years. Contributions to a Roth IRA are significantly more limiited than those to a 401k. For 2006, individuals are limited to contributing no more than $4,000 if under age 50 and $5,000 if age 50 or older. Additionally, when taxpayers earn a Modified Adjusted Gross Income of more than $110,000, ($160,000 for married filing jointly) Roth IRA contributions are prohibited.\n\nThe Roth 401k combines some of the best aspects of both the 401k and the Roth IRA. Under the Roth 401k, employees can now decide to contribute funds on a post-tax elective deferral basis, in addition to or instead of pre-tax elective deferrals under their traditional 401K plans. An employee's combined elective deferrals, whether a mixture of traditional 401k and Roth 401k deferrals, or simply one or the other-- cannot exceed $15,000 for tax year 2006 if a participant is under 50, if they are over 50, they may do an additional $5,000 catch up contribution in 2006. Employer's matching funds are counted separately from the total $15,000 elective deferral cap.\n\nThe basic difference between a Roth 401(k) and a traditional 401(k) is that the Roth version is funded with after-tax dollars while the traditional 401(k) is funded with pre-tax dollars. In general, the earnings on your Roth contributions will be tax free as long as the distribution is made 5 years after the first Roth contribution.\n\n\nThe best advantages of the Roth 401k will be realized by those who otherwise might choose a Roth IRA. The Roth 401k offers the tax free distribution advantage of the Roth IRA, but does not have any income limits for the account holder. Additionally, normal Roth IRA contributions are limited to $4,000; whereas, up to $15,000 could be contributed to a Roth 401k account, provided no other elective deferrals were taken for the tax year (no traditional 401k deferrals taken).\n\n\n\n\nThere are additional caveats to consider:\n\nContributions are irrevocable. Once the money goes into a Roth 401K account, it can't be switched over to a regular 401K. \nEmployees can roll over their Roth 401K contributions to a Roth IRA when they retire or if terminated. \nIt is up to the employers to provide the Roth 401K in addition to the regular 401K and many may decide not to do so because of the added administrative burden.