What is a Roth 401(k) anyway?
Several years ago, the IRS started allowing employers to add Roth provisions to their 401(k) plans. Over time, more employers continue to add the Roth option for their employees. When an employer offers a Roth 401(k), employees have the option to make contributions either as Roth (after-tax) contributions or traditional (before-tax) contributions.
Unlike traditional 401(k), contributions, Roth contributions are made with after-tax dollars. The money you put in today is taxed. That money grows and ultimately is able to be withdrawn tax-free in retirement if withdrawals are qualified. Having funds in both traditional and Roth vehicles can greatly enhance tax planning in retirement.
Employees have the option to direct all of their contributions in to the Traditional portion, all of them into Roth or they can use a combination of both Roth and Traditional contributions. Unlike the Roth IRA, which limits households earning above an IRS-defined threshold from making Roth IRA contributions, the Roth 401(k) does not have those limitations. Therefore, the addition of Roth 401(k) contributions is especially beneficial to those individuals whose households do not qualify to make Roth IRA contributions due to income limitations. If your household earnings are too high (For 2014, above $129,000 if filing as a single taxpayer or above $191,000 if married, filing jointly) to make Roth IRA contributions, you can still make Roth 401(K) contributions.
To find out if your employer’s 401(k) offers Roth contributions, check out the plan documents, contact your plan administrator, or human resources department for more information.
Written by: Katherine J. Morris, CFP®