You may not have heard of a Roth 401(k) or know much about it, but with a majority of companies now offering this feature for their retirement savings plan, it could be a good opportunity to fund your future.
Here’s what you need to know:
Did you say Roth 401(k)? Here’s what you need to know
Roth 401(k) money grows tax-free
Roth-designated 401(k) contributions are a discretionary feature in an employer-sponsored 401(k) plan. Unlike traditional 401(k) contributions, your Roth 401(k) contributions are included in your taxable income at the time they are made. Since you include your Roth 401(k) contributions in your taxable income when they are made, you generally won't owe federal income taxes on qualified withdrawals.1
Your employer can help fund your retirement dreams
There’s a nice little perk that may come with Roth 401(k) contributions, as well as with a traditional 401(k) contributions: matching contributions from the sponsoring company. This can turn into big bucks over time. Take note, though: depending on the terms of your employer's 401(k) plan, it is possible that Company matches are not taxed when contributed, so the contributions and gains might be included in your taxable income when you make a withdrawal.
You can sock away significant cash
A Roth 401(k) account has high contribution limits, so you can stash three times more money than in a Roth IRA. And while single-filers who earn $161,000 or more in 2024 don’t qualify to make contributions to a Roth IRA, there are no income limits to contribute to a Roth 401(k) account so those at all salary levels can participate.
Starting in 2024, as with Roth IRAs, you are no longer forced to take money out of your Roth 401(k) account when you reach a certain age
Unlike a traditional 401(k) account, you do not have to start taking required minimum distributions (RMD) starting at age 73.9
You can mix and match contribution types
The world is your oyster. You don’t have to choose just one of the retirement plan options out there. For instance, to hedge your bets on future tax rates, you can contribute to both a traditional 401(k) account and, if offered under your employer’s plan, a Roth 401(k) account. Your combined contributions, though, can’t exceed the annual $23,000 limit or $30,500 maximum for workers 50 or older during the 2024 calendar year.
Comparing the plans
| Roth 401(k) contributions | Traditional 401(k) contributions | Roth IRA | |
|---|---|---|---|
| Description | Feature that may be offered within employer-sponsored retirement plan | Feature that may be offered within employer-sponsored retirement plan | An individual retirement account you can open on your own |
| Contributions | Payroll deductions of after-tax dollars | Payroll deductions of pre-tax dollars | Funded outside of the workplace with after-tax dollars |
| 2024 income limits to contribute | None | None | $161,000 single $240,000 married couples filing jointly2 |
| 2024 annual employee/owner contribution limits | $22,500 for under age 50, $30,000 if 50 or older during the calendar year3 | $22,500 for under age 50, $30,000 if 50 or older during the calendar year3 | $6,500 for under age 50, $7,500 if 50 or older during the calendar year4 |
| Possible employer match | $23,000 $30,500 | $23,000 $30,500 | $7,000 $8,000 |
| Taxes on withdrawals | None starting in 20245,6 | Taxed as ordinary income | None6 |
| Required distribution age | 737 | 737 | None8 |
Source: Internal Revenue Service, 2024
So, is a Roth 401(k) account right for you?
A Roth 401(k) account might make the most sense if you expect to be in a higher tax bracket in retirement. In that scenario, you would pay lower taxes now on your current contributions and no taxes on your investments and gains when you start making qualified distributions. (Remember, you’ll still have to pay taxes on your employer’s contributions and earnings.)
If you’re making more money today than you expect to make in retirement, you might be better off making traditional 401(k) contributions. That way, you’d pay taxes upon withdrawal, when your tax rate is lower. Doing some research on traditional 401(k)s, IRAs and Roth IRAs will help you to find the options that best suit your needs.
As with any big money decision, consider consulting a financial advisor or another financial professional.
- Get more information on traditional 401(k)s, IRAs and Roth IRAs
- Learn how to build a solid foundation for retirement
- Withdrawals from a Roth 401(k) account are not subject to federal income taxes, so long as certain requirements for "qualified distributions" are met. State income tax laws vary; consult with your tax professional to determine how your state treats Roth 401(k) account distributions.
- For singles, the income phase-out range is $146,000 to $161,000. For married couples filing jointly, the income phase-out range is $230,000 to $240,000.
- If you make both traditional and Roth 401(k) contributions, your combined contributions cannot exceed the maximum threshold of $23,000 (or $30,500 for those age 50 and above during the calendar year).
- If you contribute to both a Roth IRA and traditional IRA, your combined contributions cannot exceed the maximum threshold of $7,000 (or $8,000 for those age 50 and above during the calendar year).
- Except for employer match or other employer contributions.
- Tax-free withdrawals (i.e., qualified distributions) are generally allowed if you're 59 1/2, disabled or deceased, and, for your Roth 401(k) account, five years have passed since your first Roth 401(k) contribution to the plan, or for your Roth IRA, five years have passed since your first contribution to any Roth IRA.
- Effective 1/1/2023, the required beginning date is April 1 of the year after you turn age 73. You are required to take an RMD by December 31 each year after that. If you delay your first RMD until April 1 in the year after you turn 73, you will be required to take two RMDs in that year. You may be subject to additional taxes if RMDs are missed. Please see your tax advisor regarding your specific situation.
- No RMDs required during the owner’s life, but RMDs are required following death.
- You are still required to take RMDs from your Roth account for 2023, even if you have a required beginning date of April 1, 2024.
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