2008 Roth 401k For Me!

It’s time to celebrate! My company just announced that we are getting the Roth 401k! I received a couple emails from coworkers that my employer is going to offer the Roth 401k next year. Yipee!! Regular readers know that I have been campaigning for access to the Roth 401k. I’ve emailed my HR department numerous times and encouraged other coworkers to do the same. It looks like our hard work paid off! (It probably had nothing to do with our emails, but it is fun to think it did!)

Background

Read what a Roth 401k is and the strategy that I won’t have to use to get extra money into my Roth IRA.

Here’s some questions I received about the Roth 401k from a reader, Julie:

If I switch to the Roth 401k versus the regular 401k will my income reported on my tax statements be $15,500 higher for the year?

Yes it will. The Roth 401k uses contributions with after-tax money. Therefore your income will be higher on your W-2 (Wage and Tax Statement) than it was using a regular 401k.

If so, it’s even harder to qualify for the Roth IRA, correct?

Yes. If you were nearing the income phaseouts and limits for the Roth IRA, contributing to the Roth 401k could make you ineligible to contribute to the Roth IRA. However, the contribution limits are higher for a Roth 401k, so depending how close you are you could come out ahead. In addition, you could implement a strategy using a combination of the traditional and Roth 401k to keep your eligibility.

How do you figure out if it’s worth it or not to switch?

Consumerism Commentary’s employer is starting a Roth 401k too and found a great calculator to help determine which option is better. Of course the calculator does not take into account other considerations that may impact the decision.

Stay tuned when we take a deeper look at the pros and cons of a Roth 401k, including reader reactions. In the mean time, check out All Financial Matters. He is helping a reader figure out whether or not to use the Roth 401k.

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