What Is A Roth 401(k)?

While many people are familiar with the benefits of traditional 401(k) plans, others are not as acquainted with Roth 401(k)s.

Since January 1, 2006, employers have been allowed to offer workers access to Roth 401(k) plans.1 And some have rolled out offerings as part of their retirement programs.

As the name implies, Roth-401(k) plans combine features of traditional 401(k) plans with those of a Roth IRA.2,3

With a Roth 401(k), contributions are made with after-tax dollars – there is no tax deduction on the front end – but qualifying withdrawals are not subject to income taxes. Any capital appreciation in the Roth 401(k) also is not subject to income taxes.

What to Choose?

The choice between a Roth 401(k) and a traditional 401(k) comes down to determining whether the upfront tax break on the traditional 401(k) is likely to outweigh the back-end benefit of tax-free withdrawals from the Roth 401(k). The information in this material is not intended as tax advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult a professional with a tax or legal experience for specific information regarding your individual situation.

Often, this isn’t an “all-or-nothing” decision. Many employers allow contributions to be divided between a traditional-401(k) plan and a Roth-401(k) plan – up to overall contribution limits.

Considerations

One subtle, but key, consideration is that Roth 401(k) plans aren’t subject to income restrictions like Roth IRAs are. This can offer advantages to high-income individuals whose Roth IRA has been limited by these restrictions. (See accompanying table.)

  Traditional
401(k)
Roth 401(k) Roth IRA
Contributions Contributions are made with pretax dollars Contributions are made with after-tax dollars Contributions are made with after-tax dollars
Income Limits No income limits to participate No income limits to participate For 2019, contribution limit is phased out between  $193,000 and $203,000 (married, filing jointly), and between $122,000 and $137,000 (single filers)
Maximum Elective Contribution* Aggregate contributions are limited to $19,000 in 2019, ( $25,000 for those over age 50)* Aggregate contributions are limited to $19,000 in 2019, ($25,000 for those over age 50)* Contributions are limited to $6,000 for 2019, ($7,000 for those over age 50)*
Taxation of Withdrawals Qualifying withdrawals of contributions and earnings are subject to income taxes Qualifying withdrawals of contributions and earnings are not subject to income taxes Qualifying withdrawals of contributions and earnings are not subject to income taxes
Required Distributions In most cases, distributions must begin no later than age 72 In most cases, distributions must begin no later than age 72 There is no requirement to begin taking distributions while the owner is alive

* This is an aggregate limit by individual rather than by plan. The total of an individual’s aggregate contributions to his or her traditional and Roth 401(k) plans cannot exceed the deferral limit – $19,000 in 2019 ($25,000) for those over age 50).

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Disclaimer: The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for ...

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