You’ve undoubtedly heard the term “Roth IRA” – these tax-free retirement accounts are incredibly popular and, if you meet the qualifications, they can be a fantastic retirement planning tool. A less-known retirement planning option is the Roth 401(k). While Roth 401(k)’s are growing in popularity, they are not as widely available as traditional 401(k) plans. Here are a few Roth 401(k) basics:
- Contribution Limit: A Roth 401(k) has the same annual contribution limit as a traditional 401(k). This year, if you’re under age 50, you can contribute up to $16,500 to your 401(k). If you’re 50 or older, you’re allowed to contribute up to $22,000.
- Income Limit: There is no maximum income that excludes you from contributing to a Roth 401(k).
- Tax-Free: When you contribute to a Roth 401(k), you contribute with after-tax dollars; there’s no income tax deduction for contributions in the year they’re made. However, when you withdraw funds from your plan during retirement, your withdrawals aren’t taxed. So, you get the full benefit of any interest earned on your contributions over the years.
- Employer Sponsored: Unlike a Roth IRA, which is an individual account and can be established by you, as an individual, with the financial institution of your choosing, a Roth 401(k) is an employer-sponsored plan. This means that if your employer doesn’t offer the plan, you’re out of luck. It also means that any matching funds contributed to your plan by your employer are treated a little differently. Employers’ matches are paid with pre-tax dollars, so they’re segregated from the contributions you make to the plan, and treated like traditional 401(k) funds.
- Required Minimum Distributions: Because a Roth 401(k) is an employer sponsored plan, you’ll have to take a Required Minimum Distribution (RMD) from your account each year after you reach age 70 ½, or face an IRS penalty.