Broker Check

What is a Roth Account? Part 2

| October 02, 2023

A Roth can be a Roth IRA or a Roth 401(k). 

       A Roth 401(k) is a type of 401(k) account that allows participating eligible employees to make after-tax contributions to their employer sponsored retirement plan. The employee then enjoys tax-free growth or accumulation throughout the length of the plan, and withdrawals are tax free and penalty free after age 59 ½ . This is the opposite to a Traditional 401 (k). 

       A Roth 401(k) and a Roth IRA differ in their contribution limits. In a Roth IRA if you earn more than $153,000 and you are single (or $228,000 and you are married) then you cannot contribute to the plan. On the other hand, a Roth 401(k) has no earning limit restrictions. In 2023, you can contribute $22,500 PLUS $7,500 if you are age 50 or older. This is besides your employer matching contributions. 

       Qualified distributions from a Roth 401(k) in retirement are tax-free, IF you: 1) had the account open for at least 5 years and are age 59 ½ or older, 3) on account of disability, 4) on or after death. If the criterion is met, you can withdraw contributions from the Roth 401(k) without tax or penalty. If the account is held in the Roth 401(k) into retirement, Required Minimum Distributions (RMD) are required on this account at age 72. If you want to leave it alone for a bit longer then you can roll it over into a Roth IRA where Required Minimum Distributions are NOT required.  

Can I contribute to both a 401(k) and a Roth 401(k)? 

       Most employers that offer a traditional 401(k) also offer a Roth 401(k) option. This Roth option can be vital in planning tax diversification in retirement. Because you may not be eligible to contribute to a Roth IRA, a Roth 401 (k) option can allow you to better manage your income distribution plans in retirement. 

       The Bottom Line is by you continually contributing to a Roth 401(k), you can help create a tax-diversified source of income stream in retirement. If you are younger and currently in a low enough tax bracket where you don’t need the tax deductions from contributions to a traditional 401 (k), then contributions to a Roth 401(k) account may be a better option. Because we do not know where tax rates will be in the future, you may find future tax-free distributions to be highly advantageous in retirement.