22 • MARTIN H. RUBY
IRAs and 401(k)s are the most common retirement savings ve- hicles today, but their Roth counterparts are gaining on them. Every so often, Congress gets something right, and that was the case when they created the Roth 401(k) and Roth IRA. These ac- counts work a little differently when it comes to taxation: • Funds are contributed with post-tax dollars, meaning this ac- count is not tax-deferred. So if you make $100, and contribute $10 to a Roth, the IRS still taxes you on all $100 of income. • Because savers have already paid taxes on their contributions, their funds grow tax-free. That means you do not owe any more taxes on the funds in your account. This includes all the earnings you’ve accumulated as your account has grown over the years. If you take $100 out of your account during retire- ment, you’ll get a check for all $100. • Taxation is the main difference
between a Roth and a traditional account. However, many other features are the same as tradi- tional 401(k)s. There is still a 10 percent tax penalty on any earn- ings withdrawn before age fifty- nine-and-one-half, though con- tributions can be taken out at any time. • These accounts are still often
linked to the market through mutual funds, meaning when the market crashes, so can ac- count values. • There are still limits on how much money you can contribute each year, and even limits on who can have a Roth. Does your three-legged stool look like this?
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