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Introducing The Roth 401(k)
Nine years ago, Congress introduced a new savings tool for investors called the Roth IRA. This new version of an Individual Retirement Account was named after the Senator that was instrumental in its creation, and it offered substantial tax advantages to persons seeking to save for retirement. Effective Jan. 1, 2006, legislation extended the tax advantages of the Roth IRA to include 401(k) plans. The “Roth 401(k)” creates a new option for law firms offering 401(k) plans to partners and employees, and gives participants the opportunity to accumulate significant tax-free wealth during their lifetime.
History of the Roth Ira
Prior to 1986 there was only one type of IRA, which has now come to be known as a “traditional IRA.” Contributions to traditional IRAs were tax-deductible, but all contributions as well as accumulated earnings were subject to income taxes when withdrawn, usually at retirement. Limitations were set so that upper income earners may not be able to utilize them. Then, in 1986, Congress created the “nondeductible IRA,” which limited the deductibility of IRA contributions made by individuals who were covered by other retirement plans such as a 401(k) plan. Contri-butions to a nondeductible IRA were not tax-deductible, nor were they taxed later on upon withdrawal. However, accumulated earnings remained fully taxable at withdrawal. However, there were no limits based on income, so upper income earners could use them. The nondeductible IRA, therefore, is a traditional IRA without the attraction of an up-front tax deduction.
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