401(k) plans for savvy investor

As an investor, you know that there are many retirement plans available to help you to save for the future. Now, there is a new retirement plan feature on the horizon. In 2006, the Roth 401(k) arrives as another vehicle for investors to build their retirement nest eggs.

If you are currently participating in a 401(k) plan and have always wanted to contribute to a Roth IRA but couldn't because of income limitations, this plan may be of interest to you. Many investors cannot contribute to a Roth IRA because of the adjusted gross income limits on this type of plan, meaning if your adjusted gross income is too high, you do not qualify for a Roth IRA. While the new Roth 401(k) is set to arrive in 2006, the IRS is still working on the details. This new investment feature is a cross between a Roth IRA and a 401(k) plan. As with a 401(k), your contributions will be taken out of your paycheck and deposited into your selected investment alternatives. And, as with a Roth IRA, you'll contribute after-tax dollars to the plan - which means you'll pay taxes on the contributions. Your withdrawals in retirement will be tax-free if taken after age 59 and after at least five years from the date of the first contribution. However, unlike a Roth IRA, there will be required mandatory withdrawals beginning at age 70, such as you would incur with a 401(k) plan or a traditional IRA.

It's important to note that if employers wish to offer the Roth 401(k) plan to employees, the employers must amend their existing retirement plans. While the government is still ironing out the details, many employers seem to be taking a wait-and-see approach to the Roth 401(k), which means your employer may not offer it immediately but you should be aware of what may come. If your employer opts to offer a Roth 401(k), you'll be able to contribute up to $15,000 in 2006, plus a $5,000 catch up contribution if you are aged 50 or older. Keep in mind that this contribution limit applies to Roth 401(k)s and traditional salary deferral 401(k) contributions in any combination. So you won't be able to contribute $15,000 to each of these plans - this limit would apply to your combined contribution to both plans.

As with any retirement plan, the most important thing is to start early and contribute consistently in order to take advantage of compounding. It's never too early to begin funding your nest egg.



This article was provided by Bill Austin, CFP® of A.G. Edwards & Sons, Inc., 925 Tahoe Blvd. Incline Village, NV. 89451 He can be reached for questions or comments at (775)-831-6107 or william.austin@agedwards.com. A.G. Edwards & Sons, Inc. Member SIPC. A.G. Edwards generally acts as a broker-dealer, but may act as an investment advisor on designated accounts, and the firm's obligations will vary with the role it plays. When working with clients the firm generally acts as a broker-dealer unless specifically indicated in writing. To better understand the differences between brokerage and advisory services, please consult Important Information About Your Relationship With A.G. Edwards on agedwards.com/disclosures.