Roth 401(k) – Frequently Asked Questions

May 20, 2009

Roth 401k’s are a relatively new option for retirement investors.  I was researching the Roth 401k to see if it was right for our family and here are some frequently asked questions I came across.

How are Roth 401(k) contributions different from regular 401(k) contributions?

Regular 401(k) contributions are made before taxes, reducing your current taxable income, and you don’t pay any taxes until you withdraw money from your account.

If you make a Roth 401(k) contribution you pay taxes up front. Contributions are made on an after-tax basis, and both the contributions and earnings are tax-free upon distribution (subject to certain requirements).

Bottom line: Regular 401(k) contributions give you an immediate tax break; Roth 401(k) contributions give it to you down the road.

Who could benefit from Roth Contributions?

You may find a Roth 401(k) appealing if you:

  • Anticipate your federal taxes will increase in the future
  • Are younger and have a long time to retirement
  • Are lower-paid with low marginal tax rates
  • Have not been able to make Roth IRA contributions due to income limits
  • Want to minimize taxable income during retirement
  • Are looking for greater estate planning opportunities

How is Roth 401(k) different from a Roth IRA?

Roth 401(k) has no income limitations; therefore Roth 401(k) may be appealing to higher-paid workers who haven’t been able to contribute to a Roth IRA. Unlike Roth IRAs, a Roth 401(k) requires a minimum distribution beginning at age 70½.

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

You can contribute the maximum allowable to a Roth IRA in addition to making Roth 401(k) contributions.

Am I eligible to make Roth 401(k) contributions regardless of my income?

Yes. Any eligible worker can contribute to a Roth 401(k) account. Unlike Roth IRAs, there are no income limitations.

Can I make both regular and Roth 401(k) contributions?

Yes. You can make all pre-tax contributions, all Roth 401(k) contributions or a combination of both. The IRS places limits on the amount of contributions you may make to a 401(k) plan. The sum of your regular 401(k) contributions and Roth 401(k) contributions cannot exceed the annual federal limit. The limit is $15,500 for 2008 and $16,500 for 2009. The over 50 catch-up limit is $5,000 in 2008 and $5,500 in 2009.

Can I switch my Roth 401(k) contributions to regular 401(k) contributions (or vice versa)?

No. Money cannot be switched after it is contributed.

Are there any special conditions to withdrawing my contributions tax-free from a Roth 401(k) account?

Yes; two conditions must be met. Your contributions and earnings are tax-free upon withdrawal provided:

  • The withdrawal is made at least five years after the year the first Roth contribution was made.
  • The money is distributed after you reach age 59½ or on account of death or disability.

What happens to my Roth 401(k) contributions if I leave my job?

Your Roth 401(k) balance can be:

  • distributed directly to you
  • rolled over into a Roth IRA
  • rolled over to another qualified retirement plan that allows for Roth 401(k) contributions

Can a Roth IRA be rolled into the Roth 401(k)?

No. Roth IRA’s cannot be rolled into Roth 401(k)s.

Will employers match my Roth 401(k) contributions?

It depends on the employer. Keep in mind that although Roth 401(k) contributions may be matched just like regular 401(k) contributions, match contributions are not available for Roth treatment. In other words, match contributions made will be subject to tax upon distribution.

Ben

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Ben

Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn’t like the other kids… His addiction to personal finance has paid off for his family and now he’s helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.


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