Roth 401(k)
A ROTH option added to a 401(k) offers unique benefits as it blends together the characteristics of a ROTH IRA and a traditional 401(k) into a hybrid product. This type of plan allows employers and employees to contribute post-tax earnings to their accounts, meaning that there will be no taxes on those contributions or any interest earned on them when the funds are withdrawn later.
This is an attractive option to add to an existing 401(k) at little to no cost, depending on administrator. ROTH 401(k) accounts can appeal to several different types of employees. Among them are younger employees who view this incentive as a way to save money on taxes in the long run; by paying taxes on the invested funds now, they may be paying a lower rate than they would be if they paid them upon taking withdrawals in the future when there may be higher rates. As younger employees are looking at a longer term of employment, this may be seen as a good benefit. The ROTH 401(k) option may also be appealing to owners or highly compensated employees who earn too much to be able to contribute to a regular ROTH IRA. There is no income cap with a ROTH 401(k), so this gives those earners another savings option that would otherwise be unavailable to them.
Withdrawals will remain tax free as long as certain criteria are met to make them qualified withdrawals. Firstly, the account must have been open for at least five years. Additionally, the withdrawal must be on account of disability, the death of the account owner, or if the account owner is at least 59 ½ years old. Differing from a regular ROTH IRA, distributions are required to be taken from a ROTH 401(k) account when the account owner reaches 70 ½ years old unless the account owner is still employed by the company holding the 401(k) and is not 5% or more owner of that company.
Employee contributions limits in a ROTH 401(k) are age-based. For 2020, the contribution limit is $19,500 (up from $19,000 in 2019). However, those aged 50 and older may contribute up to an additional $6500 as a catch up (up from $6000 in 2019).
