Kevin McCormally: I am Kevin McCormally of Kiplinger's and I am with Mary Beth Franklin, Senior Editor of Kiplingers Personal Finance magazine to talk about the Roth 401(k). Mary Beth, this is a new retirement savings tool. How does it work?
Mary Beth Franklin: Oh, it's such a great deal because normally when you save for retirement, you get a upfront tax break. That's good but when you retire and take the money out, uncle Sam takes a real big junk of it. The difference with the Roth 401(k) is all the money is yours, whatever you put in, whatever earns over all those years, it comes out tax-free.
Kevin McCormally: Okay, so the regular 401(k), we use pre-tax dollars going in. Its tax when it comes out. The Roth 401(k) is the reverse of that.
Mary Beth Franklin: Exactly, the after tax dollars is going, so there is no tax break upfront but the pay off is huge.
Kevin McCormally: Which one is better for people?
Mary Beth Franklin: For most people, the Roth 401(k) is going to be the better deal. Particularly, two groups of people, younger, lower paid workers FACE-IT, they don't get a real big bang out of their tax deduction but the thought that they may have a 20, 30 to 40 years of accumulation and that it would all come out tax-free is really a great deal for them.
Kevin McCormally: Okay, what's the other group that is really beneficial for?
Mary Beth Franklin: Well, actually higher income workers who make too much money to take advantage of the similar Roth IRA, those people can contribute to an IRA if they make up more than a $110,000 if they are single or $160,000 if they are married. But here this is a back-door where they could actually contribute to a Roth 401(k), get all that money coming up tax-free, and not only it's a good for this high income workers while are alive but they can pass it on to their heirs, tax-free.
Kevin McCormally: You can also put more money into a Roth 401(k) than the Roth IRA. Correct?
Mary Beth Franklin: Absolutely, this year the Roth IRA is limited to $4000 for most people, $5000 if you are 50 or older. Forget this with the Roth 401(k), it's the regular contribution limits like any other 401(k), that means $15,000 this year and if you are 50 or older a warping $20,000.
Kevin McCormally: Sounds great! Thank you very much.
