A traditional 401k plan is an arrangement under tax law by which an employer can deduct pre-tax money from your paycheck and the employee can invest it. In a traditional 401k this money is nontaxable until you withdraw it, at which time you will likely be in a lower tax bracket.
Those who are looking into retirement savings plans should also take not of the Roth 401k that became effective in 2006. The Roth 401k is a hybrid between the traditional 401k and the Roth IRA, and was legislated in George W. Bushs tax cut package. It operates differently than the traditional 401k plan. Below is an explanation of the pros and cons of the Roth 401k:
The bad news:
– Favorable tax treatment limited to those who are disabled, or at least 59.5 years old, or who have held the account for more than 5 years
– it is not available to taxpayers with an income above a certain level at the time their account is opened.
– There is no upfront tax deduction
– employees whose employers do not offer Roth 410k plans are ineligible
– Not many employers offer Roth 401k plans because it is new, and because it is expensive to...
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