A Roth 401(k) option has become a popular offering in many employer-sponsored retirement plans. Roth 401(k) contributions are made with after-tax dollars, but qualified distributions — including earnings — are tax free once certain conditions are met. Employees can contribute to a Roth 401(k) even if their income exceeds the limits for making contributions to a Roth individual retirement account (IRA).
- The Rules
For favorable tax treatment, funds must remain in your Roth 401(k) account for at least five tax years. After the five-year requirement is met, withdrawals are tax free once you reach age 59½ or you become disabled or die. As with a traditional 401(k), you generally must begin taking annual required minimum distributions (RMDs) from a Roth 401(k) after you turn age 70½. You can avoid taking RMDs by rolling over your Roth 401(k) to a Roth IRA prior to that age.
- Deferral Limits
The annual amount of salary that can be deferred to 401(k) plans is limited by the IRS. For 2020, the contribution limit is $19,500. If their plan allows, individuals age 50 or older may make an additional catch-up contribution of $6,500. If you have both a traditional and a Roth 401(k), the limits apply to your combined contributions. Additional plan limits may apply.
Employers can match Roth 401(k) contributions; however, matching funds must go into a pretax account and will be taxable, along with any earnings, at withdrawal.
- Rollover Option
If your 401(k) plan has a Roth feature, you may be able to roll over some or all of the money in your 401(k) account to a Roth 401(k) account inside your plan. You’ll owe income taxes on the transferred amount in the year of the transaction.