<P> In a traditional 401 (k) plan, introduced by Congress in 1978, employees contribute pre-tax earnings to their retirement plan, also called "elective deferrals". That is, an employee's elective deferral funds are set aside by the employer in a special account where the funds are allowed to be invested in various options made available in the plan . The IRS sets a limit on the amount of funds deferred in this way, and includes a "catch up" provision intended to allow older workers to save for their approaching retirement . These limits are adjusted each year to reflect changes in the cost of living due to inflation . For tax - year 2015, this limit is $18,000 for those under age 50, and $24,000 for those 50 and over . </P> <P> Employers may also add funds to the account by contributing matching funds on a fractional formula basis (e.g., matching funds might be added at the rate of 50% of employees' elective deferrals), or on a set percentage basis . Funds within the 401 (k) account grow on a tax deferred basis . When the account owner reaches the age of 591⁄2, he or she may begin to receive "qualified distributions" from the funds in the account; these distributions are then taxed at ordinary income tax rates . Exceptions exist to allow distribution of funds before 591⁄2, such as "substantially equal periodic payments", disability, and separation from service after the age of 55, as outlined under IRS Code section 72 (t). </P> <P> Under a Roth IRA, first enacted in 1998, individuals, whether employees or self - employed, voluntarily contribute post-tax funds to an individual retirement arrangement (IRA). In contrast to the 401 (k) plan, the Roth plan requires post-tax contributions, but allows for tax free growth and distribution, provided the contributions have been invested for at least 5 years and the account owner has reached age 591⁄2 . Roth IRA contribution limits are significantly lower than 401 (k) contribution limits . For tax - years 2016 and 2017, individuals may contribute no more than $5,500 per year to a Roth IRA if under age 50, and $6,500 if age 50 or older . Additionally, Roth IRA contribution limits are reduced for taxpayers with a Modified Adjusted Gross Income (modified AGI) greater than $117,000 ($184,000 for married filing jointly), phasing out entirely for individuals with a modified AGI of $132,000 ($194,000 for married filing jointly), for 2016 . See 401 (k) versus IRA matrix that compares various types of IRAs with various types of 401 (k) s . </P> <P> The Roth 401 (k) combines some of the most advantageous aspects of both the 401 (k) and the Roth IRA . Under the Roth 401 (k), employees may contribute funds on a post-tax elective deferral basis, in addition to or instead of pre-tax elective deferrals under their traditional 401 (k) plans . An employee's combined elective deferrals whether to a traditional 401 (k), a Roth 401 (k), or both cannot exceed the IRS limits for deferral of the traditional 401 (k). Employers' matching funds are not included in the elective deferral cap but are considered for the maximum section 415 limit, which is $53,000 for 2015 and 2016, or $59,000 for those age 50 and older . The higher section 415 limit also applies to after tax contributions, which, depending on the specific 401 (k), might be convertible into a Roth 401 (k) later . </P>

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