What is Roth 401(k)?
A Roth 401(k) combines features of the traditional 401(k) with those of the Roth IRA. It’s offered by employers like a regular 401(k) plan, but as with a Roth IRA, contributions are made with after-tax dollars. While you don’t get an upfront tax-deduction, the account grows tax-free, and withdrawals taken during retirement aren’t subject to federal income tax, provided you’re at least 59 1/2 and you’ve held the account for more than five years.
Who is eligible for a Roth 401(k)?
Anyone whose employer offers it.
Why should I consider Roth 401(k)?
The Roth 401(k) can offer advantages to high-income individuals who haven’t been able to contribute to a Roth IRA because of the income restrictions. (Roth IRA eligibility for 2015 contributions phases out between adjusted gross income of $116,000 and $131,000 for single filers and $183,000 to $193,000 for those who are married and file jointly). There are no such income restrictions for Roth 401(k)s.
In addition, Roth 401(k) accounts are subject to the same contribution limits as a regular 401(k) — a maximum of $18,000 for 2015, or $24,000 for those 50 or older by the end of the year, this is much higher than the 2015 Roth IRA contribution limit of $5,500 a year, or $6,500 for those 50 or older.
Should I consider Roth 401(k) or Regular 401(k)?
The 401(k) contribution limits apply to all types of 401(k) plans, be it a regular 401(k) or a Roth 401(k). So you face a difficult choice: contribute to a Roth 401(k) and suffer a cut in take-home pay (since contributions are made with after-tax dollars), or stick with a traditional 401(k) and hope that in retirement tax rate will be lower than it is now. Alternatively, you could hedge your bets by contributing to both types of accounts.
Ultimately, making a sound decision largely hinges on your estimation of the tax rates you’ll pay during your retirement years. If you expect your tax rate to be the same or higher in retirement than it is now, you might be better off with a Roth 401(k). For folks who are in the 15% or 25% tax bracket, it may not be a bad idea to pay those taxes now and never have to worry about what tax brackets might become in the future. On the other hand, if you’re in your peak earning years and you figure your tax bracket will be lower in retirement, you’ll benefit from continuing with traditional 401(k) contributions.
In reality, of course, things are much more complicated. For one, no one can predict with certainty what tax rates will be in the future, though the general consensus is that they’re likely to rise to help the government offset budget deficits and pay for Social Security and Medicare.
What happens to the employer match?
Employer matches are made with pretax dollars, and the match accumulates in a separate account that is taxed as ordinary income at withdrawal.
What are the early withdrawal rules?
Early Roth 401(k) withdrawal rules are subject to the same requirements as traditional 401(k)s, according to the IRS.
What happens if I leave my job?
The Roth 401(k) balance can be rolled over into a Roth IRA.
Is the Roth 401(k) option here to stay?
Yes. At one time, the Roth 401(k) option was temporary, but it was made permanent by 2006 legislation. So this is a deal you can count on.
A Roth 401(k) combines features of the traditional 401(k) with those of the Roth IRA. It’s offered by employers like a regular 401(k) plan, but as with a Roth IRA, contributions are made with after-tax dollars. While you don’t get an upfront tax-deduction, the account grows tax-free, and withdrawals taken during retirement aren’t subject to federal income tax, provided you’re at least 59 1/2 and you’ve held the account for more than five years.
Who is eligible for a Roth 401(k)?
Anyone whose employer offers it.
Why should I consider Roth 401(k)?
The Roth 401(k) can offer advantages to high-income individuals who haven’t been able to contribute to a Roth IRA because of the income restrictions. (Roth IRA eligibility for 2015 contributions phases out between adjusted gross income of $116,000 and $131,000 for single filers and $183,000 to $193,000 for those who are married and file jointly). There are no such income restrictions for Roth 401(k)s.
In addition, Roth 401(k) accounts are subject to the same contribution limits as a regular 401(k) — a maximum of $18,000 for 2015, or $24,000 for those 50 or older by the end of the year, this is much higher than the 2015 Roth IRA contribution limit of $5,500 a year, or $6,500 for those 50 or older.
Should I consider Roth 401(k) or Regular 401(k)?
The 401(k) contribution limits apply to all types of 401(k) plans, be it a regular 401(k) or a Roth 401(k). So you face a difficult choice: contribute to a Roth 401(k) and suffer a cut in take-home pay (since contributions are made with after-tax dollars), or stick with a traditional 401(k) and hope that in retirement tax rate will be lower than it is now. Alternatively, you could hedge your bets by contributing to both types of accounts.
Ultimately, making a sound decision largely hinges on your estimation of the tax rates you’ll pay during your retirement years. If you expect your tax rate to be the same or higher in retirement than it is now, you might be better off with a Roth 401(k). For folks who are in the 15% or 25% tax bracket, it may not be a bad idea to pay those taxes now and never have to worry about what tax brackets might become in the future. On the other hand, if you’re in your peak earning years and you figure your tax bracket will be lower in retirement, you’ll benefit from continuing with traditional 401(k) contributions.
In reality, of course, things are much more complicated. For one, no one can predict with certainty what tax rates will be in the future, though the general consensus is that they’re likely to rise to help the government offset budget deficits and pay for Social Security and Medicare.
What happens to the employer match?
Employer matches are made with pretax dollars, and the match accumulates in a separate account that is taxed as ordinary income at withdrawal.
What are the early withdrawal rules?
Early Roth 401(k) withdrawal rules are subject to the same requirements as traditional 401(k)s, according to the IRS.
What happens if I leave my job?
The Roth 401(k) balance can be rolled over into a Roth IRA.
Is the Roth 401(k) option here to stay?
Yes. At one time, the Roth 401(k) option was temporary, but it was made permanent by 2006 legislation. So this is a deal you can count on.
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