401(k): Changes Coming
Over the next 6 months, some substantial changes may take place in your
401(k) or 403(b) retirement plan at your job.
Research has shown that workers who are eligible to participate in their
companies' 401(k) plans are sometimes slow to join the plan and feel
overwhelmed if faced with too many investment choices, and rarely take
time to rebalance their portfolios in accordance with changes in market
scenarios or in various aspects of their life. Few of them even contribute
the maximum allowed, or care to regularly increase contributions. So
employers are trying to initiate a streamlined 401(k) that will have a
number of default options designed to improve workers' chances of
building a solid nested egg. The changes include far fewer investment
choices, automatic enrollment, automatic rebalancing and automatic
deferral contribution increases.
Roth 401(k): Starting in 2006, the law will allow employers to offer a new
option in 401(k) plans: to contribute after-tax money that will grow
tax-free. Currently, your 401(k) contributions are pre-tax, meaning you
get a deduction the year you make the contribution, and you pay income
taxes on your contributions plus earnings when you retire. Since this new
option is similar to Roth IRA (but also differs in many ways) it is called a
Roth 401(k) -- or a Roth 403(b) if you work for a non-profit organization.
It's not a separate plan from your existing 401(k), but rather a new
element to it.
So you will be asked first how much of your gross income you'd like to
contribute to your retirement plan -- say, 20%. And then of that, you'll
indicate how much you'd like to put in the pre-tax portion of the plan and
the after-tax portion – say, 10% in each.
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