Eligibility

• Roth 401k plans can be offered by any employer who offers a traditional 401k plan. Companies that do not offer a traditional 401k plan are not able to offer only a Roth 401k plan. If you work for an employer offering a Roth 401k plan, you are eligible to participate if you have earned income, unless you are over 70 1/2 and have over 5 percent ownership in the company. Roth 401k plans do not have income restrictions like Roth IRAs.
  
  

Contribution Limits

• The Internal Revenue Service restricts annual contributions to the smaller of the annual contribution limit or your earned income for the year. Your earned income includes paychecks, bonuses and tips. The annual contribution limit can change each year, depending on inflation. As of 2010, the limit is $16,500 if you are younger than 50 years old. If you are 50 or older, the IRS increases the limit to $22,000.
  
  

Considerations

• The IRS permits your employer to match contributions you make to the Roth 401k plan on your behalf. However, those contributions cannot be added to your Roth 401k account. Instead, a separate traditional 401k plan must be created to hold the matching contributions. The matching contribution will be treated like a traditional 401k contribution: The money is not included in your taxable income but you will have to pay income taxes on the money when you take withdrawals.
  
  

Time Frame

• Roth 401k plans require that you be at least 59 1/2 before taking qualified withdrawals, just like traditional 401k plans. However, the Roth 401k also requires that you have the account open for five tax years before you take qualified withdrawals. If you take an unqualified withdrawal, you will have to pay income taxes and a 10 percent early withdrawal penalty on the portion of the withdrawal that comes from earnings. For example, if you took a $9,000 withdrawal from an account that had 50 percent earnings and 50 percent contributions, $4,500 would be added to your taxable income for the year and you would have to pay a $450 early withdrawal penalty.
  
  

Warning

• Roth 401k plan contributions do not offer any tax deductions for contributions. If you think you are in a higher tax bracket in the current year than you will be at retirement, you are likely to be better off putting your money into a traditional 401k rather than a Roth 401k plan. If you are unsure, or want to hedge your bets, you are permitted to contribute money to both a traditional 401k plan and a Roth 401k plan in the same year. However, the contribution limit applies to both types of accounts so each dollar you put in a traditional 401k decreases the amount you can put in a Roth 401k.