Frequently Asked Roth 401(k) Questions
How does a Roth 401(k) plan differ from a traditional 401(k) plan?
The primary difference relates to the taxation of the money in the plans. Traditional 401(k) plans allow pretax contributions and tax-deferred investment growth potential, but future distributions (withdrawals) are taxable. On the other hand, Roth 401(k) plans permit post-tax contributions, tax-deferred investment growth potential, and tax-free qualified withdrawals. Qualified withdrawals are those that are made after the participant reaches age 59½ and has held the account for at least five years. (Note that withdrawals are also allowed for certain extenuating circumstances -- as defined by the IRS -- such as death or permanent disability.)
Can anyone contribute to a Roth 401(k)?
If your employer chooses to offer a Roth 401(k) plan, then you may opt to participate in it. Unlike a Roth IRA, there are no income restrictions on Roth 401(k) eligibility.
Can I contribute to both a Roth 401(k) plan and a traditional 401(k) plan?
If your employer provides both a Roth and a traditional 401(k) plan, you can contribute to both, subject to certain contribution limits.
What are the contribution limits for a Roth 401(k) plan?
In 2017, the total annual contribution limit for workers is $18,000, regardless of the number or type(s) of plans used. That means that if you choose to participate in both a traditional 401(k) plan and a Roth 401(k) plan, the total amount you are allowed to contribute to both cannot exceed $18,000.
Workers aged 50 and older can make additional "catch up" contributions of up to $6,000 to traditional and Roth 401(k) plans in 2017.
Can I roll over the money in my traditional 401(k) account to my Roth 401(k) account?
No. There are currently no provisions allowing such a rollover. However, you may be allowed to roll over money from one Roth 401(k) plan to another Roth 401(k) plan or to a Roth IRA. Note that your employer may set lower limits.
Can I contribute to a Roth 401(k) and a Roth IRA?
It depends. While there is no rule specifically preventing you from contributing to both types of accounts during the same year, income limits may restrict or negate your ability to contribute to a Roth IRA.
If I contribute to a Roth 401(k) plan and a traditional 401(k) plan with the same employer, how will I be able to keep track of the different accounts?
Employers who choose to offer a Roth 401(k) plan in addition to a traditional 401(k) plan will be required to create separate accounts for participants' Roth 401(k) contributions and investments. That means the money in your traditional 401(k) account cannot be "mingled" with the money in your Roth 401(k) account. As a result, your account statements will likely reflect the status of each individual account.
Is it better to contribute to a traditional 401(k) or a Roth 401(k)?
That depends on your personal situation and priorities. For example, because Roth 401(k)s allow tax-free withdrawals, they might be more appropriate for workers who expect to be in a higher income tax bracket during retirement. High-income earners who make too much to contribute to a Roth IRA may also find the Roth 401(k) attractive, as there are no income limitations for Roth 401(k) participation.
Traditional 401(k)s, on the other hand, may be more appropriate for workers who want a tax break now and/or who expect to be in a lower income tax bracket during retirement. A financial advisor can help you determine which account may be right for your needs.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.