Roth 401(k)....Compounding the IRS's Mistake


In 1998 Congress enacted a law allowingthe Roth IRA to be born. This allowed people to put after tax money away to save for retirement. The benefit here is that if certain rules are followed investors can remove the money along with any earning completely tax-free!

While this was not the most prudent move there was very little potential for revenure loss because of the low contribution limits and therefore the low potential tax revenue.

Begining in 2006, in their great wisdom, they decided to allow Roth contributions into a 401(k). Roth 401(k) contributions can be made up to the 401(k) limits (currently $15,000).

Assuming they do not come to their senses and do away with this regulation in 2011 when they have the first opportunity, they stand to give americans millions in tax free income.

If a 25 year old contributes $15,000/year into a Roth 401(k) until they turn 65, assuming an annual return of 8% they would be able to take out just under $4 million tax free. If that same person is in the 35% tax bracket that would be $1.4 million in tax revenue.

While I'm not confident that this oversight will remain for the next 40 years, it must remain for at least 5. You should put as much money into this while the option is there.