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THE ROTH 401(K): AN INTRODUCTION
The Roth 401(k) gives you a tool for creating
potentially tax-free income in retirement
through payroll deductions. Sharing some of
the same rules and potential benefits as the
Roth IRA, the Roth 401(k) is now offered by
your employer in addition to the traditional
retirement savings plan.
If you enroll in a Roth 401(k) plan, you will
set aside money from your paycheck after
it has been taxed, but the money can then
grow on a tax deferred basis and
contributions and earnings can eventually
be withdrawn tax free. It’s this particular
tax treatment that distinguishes the Roth
401(k) plan from the traditional 401(k) plan.
In a traditional 401(k) plan, contributions are
made on a pre-tax basis and can grow tax
deferred until withdrawn, when
contributions and earnings are taxed at your
ordinary income tax rate.
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If you decide to make both Roth and
traditional retirement savings plan
contributions, you’ll effectively have two
separate accounts. The assets have to be
kept separate because of the unique tax
treatment of each plan type. For the same
reason, you can’t switch your Roth 401(k)
plan savings over to a traditional pretax
savings plan later on.
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If your employer provides matching
contributions, you can earn a match when
you contribute to your Roth 401(k) plan
account, but the matching portion cannot
be directed into the Roth account. Instead,
the matching portion would be directed to
your traditional savings plan account.
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You can withdraw money from the Roth
401(k) without paying tax or penalties
provided you are at least age 59 ½ and
have held the account for five years or
longer. These are the same rules that apply
to Roth IRAs.
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Just as with a traditional 401(k) you will
need to begin taking minimum
distributions after you reach age 73.
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You can roll over your Roth 401(k) plan
assets to a Roth IRA when you retire or
change employers. In addition, Roth 401(k)
plan assets can be rolled into another
employer’s Roth 401(k) plan, if available
and plan rules allow.
Authorized by 2001 Federal Tax Law
The Roth 401(k) has been a long time
coming. It’s been waiting in the wings since
2001, when it was authorized by the
Economic Growth and Tax Relief
Reconciliation Act (EGTRRA). But the law
delayed its introduction until 2006.
The Roth 401(k) has features that may be
attractive to you, depending on your current
income tax rate, future income expectations,
the number of years you have to save, and
what you estimate your tax rate will be in
retirement.
How the Roth 401(k) Works
A look at the rules governing Roth 401(k)
plans may help you decide whether they
would work to your advantage.
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A Roth 401(k) plan participant may
contribute up to $23,000 in 2024. An
additional $7,500 in catch-up
contributions are allowed if you are age
50 or older. If you are also contributing
to a traditional retirement savings plan,
the maximum you can contribute to
both accounts for 2024 is $23,000 (plus)
$7,500 if you meet the age requirement
50 or older)
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