The 401k Easy Roth 401k plan option
As the name implies, a Roth 401k combines features of the traditional 401k with those of the Roth IRA. The Roth 401k is offered by plan sponsors alongside a traditional 401k. Employees make contributions to the Roth 401k in addition to (or as an alternative to) making contributions to their traditional 401k. Unlike a traditional 401k contribution, which is always pre-tax, all Roth 401k contributions are made with the employee's after-tax dollars. As with the traditional 401k, the participant's Roth 401k contributions grow tax-free. But unlike traditional 401ks, withdrawals taken from the Roth 401k during retirement not subject to income tax, provided the account holder is 59 1/2 and the Roth 401k contributions have been held in the account for a minimum of five years.
|Traditional 401k Contributions||Roth 401k Contributions|
|When you will pay taxes on your contributions||You pay the tax upon withdrawal. Contributions are tax-deferred, so current taxes are reduced.||You pay regular income tax on your contributions before the money goes into your account. Current taxes are not reduced.|
|When you will pay taxes on any investment earnings||You pay taxes on the full amount of any distribution, including earnings, at ordinary income tax rates in effect upon withdrawal.||Your contributions have already been taxed, so there is no tax on them and no taxes on any earnings if you take a qualified distribution.|
|Qualified distribution rules*||Contributions and any earnings remain in account until age 591/2 or a separation from service that qualifies for retirement distributions. Withdrawals are subject to current ordinary income tax at withdrawal (and a 10% tax penalty may apply before age 591/2) unless the tax deferral is continued.||Contributions and earnings are distributed tax-free if they meet the requirements of a qualified distribution; earnings in a non-qualified distribution are subject to current ordinary income tax (and a 10% tax penalty may apply before age 591/2) unless the tax deferral is continued.|
|Impact of contributions on take-home pay||Since contributions are pre-tax, your current income tax is reduced and each $1 contributed reduces your take-home pay by less than $1.||Because you pay current taxes on your contributions, take-home pay is reduced dollar for dollar by your contributions.|
|Rollovers from your account||You may roll over your account balance upon termination to a traditional IRA, a 401k plan or another qualified employer-sponsored plan.||You may roll over your account balance upon termination to a Roth IRA or another Roth 401k or Roth 403(b) account in a qualified employer plan.
Note: For purposes of the 5-year rule for qualified distributions, the date of the initial contribution to a Roth IRA governs.
|Taxes on employer match, if applicable||Employer matching contributions are made on a pre-tax basis; contributions and any earnings are taxable upon withdrawal.||Same. The employer match is not treated as a Roth contribution.|
|Required minimum distributions||You must begin required minimum distributions by April 1 of the year following the year in which you reach age 701/2 or at retirement, if later.||You must begin required minimum distributions by April 1 of the year following the year in which you reach age 701/2 or at retirement, if later.|
|Loan and hardship||Account balances are available for 401k loans and hardship withdrawal if the plan allows.||Contributions are available for 401k loans and hardship withdrawal if the plan allows.|
*For purposes of qualified distributions, disability must meet the definition stated in Internal Revenue Code Section 72(m) (7).