A Roth 401(k) is a type of retirement savings plan that is funded with post-tax money. It is an employer-sponsored plan, meaning that it can only be used if it is offered at your workplace. The Roth 401(k) combines some of the most advantageous aspects of both the 401(k) and the Roth IRA. Some key features of a Roth 401(k) include:
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Contributions: Employees may contribute funds on a post-tax elective deferral basis, in addition to or instead of pre-tax elective deferrals under their traditional 401(k) plans. An employees combined elective deferrals whether to a traditional 401(k), a Roth 401(k), or both cannot exceed the IRS limits for deferral of the traditional 401(k) .
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Taxation: Contributions to a Roth 401(k) are made with income that has already been taxed, allowing investments to grow and be withdrawn in retirement without being taxed. In contrast, traditional 401(k)s reduce your taxable income because contributions are taken directly from your paycheck.
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Withdrawals: Withdrawals in retirement from a Roth 401(k) are tax-free. With a Roth 401(k), your non-qualified withdrawals are a pro-rata amount of your contributions and earnings, and you may potentially be subject to the 10% early withdrawal penalty if you're under age 59½.
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Limits: In tax year 2023, normal Roth IRA contributions are limited to $6,000 ($7,000 if age 50 or older); up to $19,500 could be contributed to a Roth 401(k) account if no other elective deferrals were taken for the year.
A Roth 401(k) is a solid choice for higher-income workers, as it offers great benefits for workers looking to put away money for their retirement. It can also be a good choice for individuals who expect to be in a higher tax bracket in retirement than they are currently.
