The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 12. What about Roth?

MOST U.S. ADMINISTRATIONS understand the urgency of retirement savings for Americans. But no two take the same view of it. Some believe the government should provide much more for retirees; some much less. And at the beginning of 2009, after 401(k) participants lost big chunks of retirement money in the stock market, there was a movement to get rid of 401(k) plans altogether.^[3]

As a result, each major tax reform act addresses retirement savings in some way: by raising the limit on retirement savings contributions or lowering it; or by taking away tax advantages or giving more of them. So the tax code for retirement savings is convoluted and complex, just as it is for most other taxable events.

One of the provisions of the Taxpayer Relief Act of 1997 created the Roth IRA, named for Senator William Roth of Delaware, a long-time campaigner for retirement accounts, and the Roth IRA became available beginning in 1998. The twist to a Roth account is that you contribute after-tax money and the earnings on it grow tax free so that you need never pay tax on that money again. For 2008, individuals are limited to contributing no more than $5,000 to a Roth IRA if under age fifty and $6,000 if age fifty or older. Roth IRAs also have an income ceiling: They are prohibited when taxpayers earn a modified gross income of more than $110,000 or $160,000 for married filing jointly.

The Roth 401(k) account was added to the family in 2006. It combines some of the most advantageous ...