Roth 401(k) Retirement Savings

What Is a Roth 401(k)?

Roth 401(k)s, like traditional 401(k)s, are employer-sponsored retirement plans. As the name suggests, the Roth 401(k) shares some similarities with the traditional 401(k). Both plans feature annual limits to the amount you can contribute (as determined by the IRS).

However, unlike regular 401(k) deferrals, contributions to a Roth 401(k) are made with after-tax dollars, meaning you pay your income taxes up front and then make contributions. Roth 401(k) contributions do not lower your taxable income for the year in which they are made. Your employer may also make matching contributions up to an annual limit determined by the IRS. The same contribution limits apply for both the Roth and the traditional 401(k).

For 2024, the 401(k) contribution limit is $23,000 for people under 50 years old. If you have both a traditional 401(k) and a Roth 401(k), you could contribute $11,500 to one and $11,500 to another, but not $23,000 to both. Employees age 50 or older are eligible to make catch-up contributions of up to an additional $7,500 for a total of $30,000.

If your employer is matching your Roth 401(k), the combined limit for employer-employee contributions in 2024 is $69,000 per year. With the catch-up contribution, the limit would be $76,500.

MissionSquare 401(k) plans can include a Roth 401(k) feature that allows you to make deferrals to both plans — so long as the total contribution for both doesn’t exceed the annual limit.

With a Roth 401(k) you must take Required Minimum Distributions (RMDs) at age 73* unless you are still working, just as with a traditional pre-tax 401(k). You may also begin taking money from your Roth 401(k) at age 59½ without penalty if you’ve held the account for at least five years; if you are separated from your employer; or if your plan permits in-service distributions. You can also receive Roth 401(k) distributions if you have a qualifying disability. You may also leave unspent Roth 401(k) funds to your heirs upon your death.

If your 401(k) plan permits Roth deferrals, you can use the Roth Analyzer to determine which type of deferral is more advantageous for you.

If you choose to begin making Roth contributions, you will need to complete a change form. Contact MissionSquare Retirement at (800) 669-7400 to obtain the form.

Does a Roth 401(k) Have Income Limits?

Unlike a Roth IRA, there are no income limits to participate in a Roth 401(k).

Benefits of Contributing to a Roth 401(k)

  • Tax-free assets and earnings. Qualified distributions of Roth assets (contributions and associated earnings) are completely tax-free.
  • Tax diversification. Your future circumstances are difficult to predict, so having both pre-tax assets and Roth assets available in retirement can allow you more flexibility in managing the taxable income at time of distribution.

How Are a Roth 401(k) and Traditional 401(k) Different?

The main difference between the Roth 401(k) and a traditional 401(k) is how you’re taxed when you withdraw money upon retirement. With the Roth 401(k), you will pay taxes up front, before you contribute funds. Therefore, your earnings grow tax-free, and withdrawals are also tax-free (assuming you have reached 59½ years old and have held the account for at least five years). However, any employer contributions are subject to taxes.

With a traditional 401(k), however, you’ll have to pay taxes when you withdraw funds since you contributed pre-tax dollars to your 401(k).

When to Choose a Roth 401(k) vs. a Traditional 401(k)

Contributing to a Roth 401(k) allows you to get taxes on contributions out of the way now so you can enjoy tax-free withdrawals later in life. If you have a traditional 401(k), you can also contribute to a Roth 401(k), as long as your combined contributions don’t exceed the annual contribution limit. If your employer matches your contribution—whether in a Roth or a traditional 401(k)—it’s a good idea to go for the matching contribution, no matter what.

Some people find that having both a Roth and a traditional 401(k) is a way of diversifying for the future, given the uncertainty of taxes. In general, however, if you expect to be in a higher tax bracket when you’re older, you may wish to opt for the Roth 401(k). That way you won’t be paying taxes on a nest egg that you’ve saved for so diligently.

How Does a 401(k) Roth Conversion Work?

A MissionSquare a 401(k) Roth conversion generally refers to converting some or all of your 401(k) savings to a Roth 401(k) within your existing plan. You might decide to do this after saving a considerable amount in your 401(k) and wanting to have some of that savings available as tax-free withdrawals later.

If your employer doesn’t offer a Roth 401(k), you could convert some or all of the funds in your 401(k) into a Roth IRA, but only if you have left your employer, or the employer allows you to take in-service distributions. You would pay taxes on the amount you’d like to convert. Conversions to a Roth IRA typically involve more steps. Check with your plan sponsor first.

When to Withdraw from a Roth 401(k)

Qualified distributions from a Roth 401(k) can be made as long as:

  • Five taxable years have passed since your first Roth contribution. Note that the date of your first Roth contribution is calculated as January 1 of the year in which your first contribution was made, regardless of the actual date during the year it was made.
  • At least one of the following also applies:
    • The distribution is made on or after the date you reach age 59½.
    • The distribution is made to your beneficiary(ies) in the event of your death.
    • You are permanently disabled.

If the above requirements for a qualified distribution are not met, the earnings portion of the Roth 401(k) distribution will be taxable and may also be subject to an early withdrawal penalty.

What’s the Difference Between a Roth 401(K) and a Roth IRA?

While Roth 401(k) contributions are similar in many respects to Roth IRA contributions, they differ in some important ways, such as:

  • Higher contribution limits. Roth 401(k) plans allow for larger after-tax savings.
  • No income limits. Unlike Roth IRAs, you are eligible to make Roth 401(k) contributions regardless of your income.
  • Distribution rules. While Roth IRA assets can generally be withdrawn at any time, you can only withdraw funds from your Roth 401(k) when permitted by the plan. Roth 401(k) assets are also subject to Required Minimum Distribution rules while Roth IRAs are not.

Contributing to Both a 401(k) Plan and a Roth IRA

Making Roth contributions to your 401(k) plan does not reduce the amount you may contribute to a Roth IRA annually (unlike a Roth 401(k). You are eligible to contribute the maximum amount to both plans.

Register online to open a MissionSquare Roth 401(k) plan. For more information, contact MissionSquare Retirement at (800) 669-7400.

* Age 70½ (if you were born before July 1, 1949), age 72 (if you were born after June 30, 1949, and before January 1, 1951), or age 73 (if you were born after December 31, 1950).

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