Understanding Roth
Key Takeaway
Your plan may provide the option of making either traditional or Roth contributions. See your enrollment materials or contact your plan sponsor for details about your plan. The following is an overview of the Roth feature.
Eligibility
If your plan offers Roth contributions, you can participate once you meet the plan’s eligibility requirements. There are no income restrictions, so high-income individuals can contribute as well; subject to tax or plan limits that may apply. Check with your employer to see if Roth is available.
Contributions
You can contribute up to the maximum limits set by the IRS and your plan sponsor. If you make both regular pre-tax contributions and Roth contributions, your combined contributions can’t exceed these limits. Check the chart below for current IRS limits.
Taxes
Roth contributions are made with after-tax dollars so the account grows tax free and qualified withdrawals will not be taxed. If you expect your tax bracket during retirement to be higher than now, Roth contributions may make sense for you. Seek advice from a tax professional for more detail.
Distributions
Distributions must be “qualified” if they are to be treated as tax free. A distribution is qualified if made after you reach age 59½, are deceased, or become disabled, and it is made at least five years after your first Roth contribution.
Matching Contributions
Any matching employer contributions on Roth contributions are made with pre-tax dollars, as with traditional contributions.
Changing Jobs
If you leave your employer, you can roll over your Roth account to a Roth IRA or to a new employer’s plan, if it accepts such rollovers.
Required Minimum Distributions
Unlike a Roth IRA, employer sponsored retirement plans must distribute required minimum distributions (RMDs) once you terminate employment and reach age 72. Once you are eligible to request a distribution, consider rolling your Roth account to a Roth IRA, thereby avoiding the RMD rules.
| Details | Traditional 401(k) | Roth 401(k) | Roth IRA |
|---|---|---|---|
| 2023 Income Limits | None | None | Single: $153,000 Married: $228,000 |
| Contributions | Pre-tax | After tax | After tax |
| 2023 Contribution Limit | Combined $22,500 | Combined $22,500 | $6,500 |
| 2023 Age 50 Catch-Up | Combined $7,500 | Combined $7,500 | $1,000 |
| Investment Earnings | Tax deferred | Tax free | Tax free |
| Accessibility | Requires distributable event | Requires distributable event | Requires distributable event |
| Withdrawals | Taxable: subject to ordinary income tax and 10% penalty tax if taken prior to age 59½ | Tax free if in plan five years and have reached age 59½ or taken due to death or disability | Tax free if in account five years and have reached age 59½ or taken due to health, disability, or first-time home purchase |
| Minimum Distributions | Age 72* | Age 72* | None |
| Rollovers | Yes, to another retirement plan or an IRA | Yes, to another Roth plan or a Roth IRA | Yes, to another Roth IRA |
Source: irs.gov
*Individuals attaining age 70½ prior to January 1, 2020, are subject to pre-SECURE Act distribution requirements.