This article will explore the two types of Roth IRA's, the Roth IRA and the Roth 401(k). I will address the similarities and the substantial differences in the two.

The Roth 401(k) plans started in 2006 with the Economic Growth and Tax Relief Reconciliation Act of 2001. They are often referred to as hybrids, meaning they are a cross between the traditional 401(k) plan and the Roth IRA. A Roth 401(k) is an option under the traditional 401(k) plan. So a plan cannot exist with only a Roth 401(k), plans must offer both pre- and after tax contribution options. An after tax contribution is made by designating a portion of your compensation as a Roth 401(k) contribution. You must know that this designation is irrevocable, you will not be able to reassign a Roth 401(k) contribution to have it later treated as a conventional pre-tax contribution.

Roth 401(k) contributions will not reduce your W-2 income. The amount of the contribution will be included in your income and be reported on your W-2 as taxable wages and compensation. The advantage is that earnings can then build up tax free.

Traditional 401(k)s and Roth 401(k)s have many similarities. Both traditional Roth IRA's and the Roth 401(k) have the same contribution limits. Fro 2007, up to $15,500 can be designated as a Roth 401(k) contribution, or if you are 50 or older you can designate up to $20,500 by the end of 2007. The contribution limits are adjusted annually for inflation. You may designate all or part of your contribution to the Roth 401(k). You must decide on how to split these contributions by looking at your tax situation and the advantages of each plan. You should consider the current and the future tax implications of each plan and weigh the current tax cost against the potential tax free income in the future.

Employers are allowed to make contributions , but the actual contributions can only be allocated to the traditional 401(k) accounts. No portion of your employer match may be allocated to the Roth 401(k). Also, funds must be held separately for regular and Roth 401(k) contributions. Investment earnings and charges must be allocated appropriately to each type of account. If you have any plan forfeitures, they can only be allocated to the conventional 401(k); they cannot be allocated to the Roth 401(k).You will have to keep track of each.

You must designate a contribution to the Roth 401(k) before a contribution can be made. Also, under the terms of the plan you must be able to make designations annually.

Allocations to each type of account are non-forfeitable. This means that if you leave a job, you have the option to roll over the Roth 401(k) to an account with a new employer or to roll the funds over to a Roth IRA. A rollover to another Roth 401(k) can be made only via a direct transfer to a new account. The five-year period, discussed more fully below, will carry over to the new Roth 401(k).

If funds should be distributed to you directly, you can be roll over the funds within 60 days to a Roth IRA. They cannot be rolled over to a Roth 401(k) at a new employer because they were distributed directly to you rather than transferred directly to the new Roth 401(k). The five-year period does not carry over from a Roth 401(k) to a Roth IRA; a new five-year period must commence following a rollover to a Roth IRA. Also, once funds have been rolled into a Roth IRA, they cannot be rolled to a Roth 401(k).

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