Roth 401(k) Basics
Elective deferral contributions to a traditional retirement plan are contributed on a pre-tax basis and help lower your current taxable income. Roth elective deferral contributions, however, are much like a Roth IRA in that contributions are made on an after-tax basis. Money in the Roth account and any earnings will be distributed tax-free if withdrawn after age 59½, death, disability and at the end of the five-year taxable period during which the participant’s deferral is first deposited into the Roth 401(k) account (a.k.a. the Five Year Rule). A Roth 401(k) account can be rolled over to another plan that permits Roth 401(k) contributions or to a Roth IRA. If rolled into a Roth IRA, the tax-free nature remains and the money is not subject to the minimum distribution requirement at age 70½ as in the Roth 401(k).
Who Would Likely Benefit?
Who Would Likely Not Benefit?
|Traditional 401(k)||Roth 401(k)|
|Tax treatment of deferrals||Before tax||After tax|
|Tax treatment of earnings||Tax deferred||Tax-free|
|Tax treatment of final distributions||Taxable at ordinary income tax rates||Tax-free|
|2018 402(g) Salary Deferral Limits||*$18,500(*Traditional + Roth)||*$18,500(*Traditional + Roth)|
|2018 Catch-up Limit||*$6,000(*Traditional + Roth)||*$6,000(*Traditional + Roth)|
|Distribution Restrictions||Subject to 401(k) rules, qualified distribution||Subject to 401(k) rules, qualified distribution and
Roth 401(k) account must be open for five tax years
In summary, Roth 401(k) contributions have potential to allow individuals more flexibility in saving for retirement, whereby giving investors more control over the taxable alternatives. Take a cautious approach when weighing the pros and cons.