THE ROTH 401(K): AN INTRODUCTIONThe Roth 401(k) gives you a tool for creatingpotentially tax-free income in retirementthrough payroll deductions. Sharing some ofthe same rules and potential benefits as theRoth IRA, the Roth 401(k) is now offered byyour employer in addition to the traditionalretirement savings plan.If you enroll in a Roth 401(k) plan, you willset aside money from your paycheck afterit has been taxed, but the money can thengrow on a tax deferred basis andcontributions and earnings can eventuallybe withdrawn tax free. It’s this particulartax treatment that distinguishes the Roth401(k) plan from the traditional 401(k) plan.In a traditional 401(k) plan, contributions aremade on a pre-tax basis and can grow taxdeferred until withdrawn, whencontributions and earnings are taxed at yourordinary income tax rate.•If you decide to make both Roth andtraditional retirement savings plancontributions, you’ll effectively have twoseparate accounts. The assets have to bekept separate because of the unique taxtreatment of each plan type. For the samereason, you can’t switch your Roth 401(k)plan savings over to a traditional pretaxsavings plan later on.•If your employer provides matchingcontributions, you can earn a match whenyou contribute to your Roth 401(k) planaccount, but the matching portion cannotbe directed into the Roth account. Instead,the matching portion would be directed toyour traditional savings plan account.•You can withdraw money from the Roth401(k) without paying tax or penaltiesprovided you are at least age 59 ½ andhave held the account for five years orlonger. These are the same rules that applyto Roth IRAs.•Just as with a traditional 401(k) you willneed to begin taking minimumdistributions after you reach age 73.•You can roll over your Roth 401(k) planassets to a Roth IRA when you retire orchange employers. In addition, Roth 401(k)plan assets can be rolled into anotheremployer’s Roth 401(k) plan, if availableand plan rules allow.Authorized by 2001 Federal Tax LawThe Roth 401(k) has been a long timecoming. It’s been waiting in the wings since2001, when it was authorized by theEconomic Growth and Tax ReliefReconciliation Act (EGTRRA). But the lawdelayed its introduction until 2006.The Roth 401(k) has features that may beattractive to you, depending on your currentincome tax rate, future income expectations,the number of years you have to save, andwhat you estimate your tax rate will be inretirement.How the Roth 401(k) WorksA look at the rules governing Roth 401(k)plans may help you decide whether theywould work to your advantage.•A Roth 401(k) plan participant maycontribute up to $23,000 in 2024. Anadditional $7,500 in catch-upcontributions are allowed if you are age50 or older. If you are also contributingto a traditional retirement savings plan,the maximum you can contribute toboth accounts for 2024 is $23,000 (plus)$7,500 if you meet the age requirement50 or older)Page 7
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