Although a growing number of employers are adding a Roth 401(k) to their retirement plan offerings, the newer savings vehicle is still not widely understood. If your company provides this option or you’d like it to, the following information should prove useful.
The Roth 401(k) provides many of the same advantages a privately held Roth IRA does. Contributions to both accounts are made with after-tax dollars, grow tax-free and offer tax-free withdrawals during retirement. But the two have marked differences, including:
Income restrictions. There are no income restrictions when contributing to a Roth 401(k). To make the maximum contribution to a Roth IRA in 2019, a single filer’s modified adjusted gross income must fall below $122,000; a married couple filing jointly must have a combined income below $193,000.
Contribution amounts. Roth 401(k)s enjoy high contribution limits. In 2019, an employee can contribute up to $19,000, or $25,000 if they are age 50 or over – compared to up to $6,000 in a regular Roth IRA, with a $1,000 additional catchup contribution for anyone 50 or older. In addition to making bigger contributions, an employee with a Roth 401(k) may benefit from an employer match. However, the employer’s portion must go into a traditional 401(k) account and will incur income tax when withdrawn.
Required minimum distributions. While there are no RMDs with Roth IRAs, distributions are typically required each year after age 70½ with Roth 401(k)s – unless the account holder is still employed by the company and doesn’t have an ownership stake in it.
Investment options. An individual with their own Roth IRA is free to choose investments, compared to a person limited to investments offered by their Roth 401(k).
Contribution deadlines. Generally, contributions to Roth 401(k)s must be made by the end of the year. But it’s possible to apply Roth IRA contributions to the current year if they’re made by the tax filing deadline in April of the upcoming year.
With the variety of retirement plans available today, it can be difficult to weigh each option’s advantages and disadvantages. Contact our office today for help determining which plan or combination of plans best suits your individual goals and circumstances.
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