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Industry Changes and 401k Plans

Recent 401k Developments

Beginning in the 2006 tax year, a new option has been opened up to certain employees. If your employer or plan sponsor has chosen to amend your plan, you can use your Roth 401k or Roth 4013(b) as if it were a Roth IRA. Here is an outline of the way the new system can work. Remember that this is an example of a plan that is available; your employer can customize the plan that she makes available to employees.

Unlike a traditional IRA, the income deferred into your 401k plan is not federally taxed. Therefore, in addition to depositing savings, you will be paying taxes on a smaller income. If you are a worker who earns $50,000 and your annual contribution is $3,000, you would only have $47,000 in taxable income. At 2004 tax levels, and assuming that your tax bracket of 25%, this would earn you a $750 tax savings.

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