A Roth 401k plan is a tax-advantaged retirement savings account some companies offer to their employees. You can only have a Roth 401k retirement account if it is offered by your employer. Some employers offer traditional 401k plans, but not Roth 401k plans, in which case you are out of luck. However, according to Smart Money, employers are more likely to add a Roth 401k option if employees request it.

Signing Up

In most cases, you sign up for a Roth 401k with your company's human resources department. You will let them know how much of your paycheck you want to go towards your Roth 401k contributions and instead of that amount coming to you in your paycheck, it will be put into the company's Roth 401k plan. You are only allowed to contribute a certain amount per year, depending on your age. For 2010, the contribution limit is $16,500 if you are younger than age 50. If you're 50 and older, you can contribute an additional $5,500 for a total of $22,000. However, these limits are cumulative with traditional 401k plans, so each dollar you contribute to a traditional 401k plan reduces how much you can put in your Roth 401k. Roth 401k contributions are made with after-tax dollars, meaning that you do not receive a tax deduction for the money you put in your account. If you are switching from contributing to a traditional 401k to a Roth 401k, you will notice a decrease in your tax home pay because the Roth 401k contributions are not tax deductible. If your employer offers a matching contribution for your retirement contributions, the company match must be put in a traditional 401k account rather than being combined with your contributions in a Roth 401k account. This is significant because the withdrawals from the traditional 401k account are considered taxable income at retirement.

Benefits

A major motivation for contributing to a Roth 401k for most people is the the tax advantages. Though your contributions to a Roth 401k plan are not tax deductible like contributions to a traditional 401k plan, the money grows tax free and the Internal Revenue Service (IRS) does not take the earnings even when you withdraw the money at retirement. These benefits make Roth 401k plans preferable for people who expect to fall in a higher tax bracket at retirement than they do in the current year. Like traditional 401k plans, you are able to take a loan from your 401k plan without the money being considered a distribution from your account for tax purposes.

Warnings

You cannot withdraw the earnings on your Roth 401k plan until you reach age 59 1/2 or else they will be taxed as income and you will have to pay a 10 percent early withdrawal penalty. If you are separated from your job after age 55, you can start taking distributions penalty-free.

Source:

Smart Money: Understanding the Roth 401k

Yahoo! Finance: How to Choose Between Traditional and Roth 401k