Q&As on Roth 401(k)s
The Roth 401(k) is 10 years old! With 62% of employers now offering this option, it's more likely than not that you can make Roth contributions to your 401(k) plan.1
Are you taking advantage of this opportunity?
What is a Roth 401(k) plan?
A Roth 401(k) plan is simply a traditional 401(k) plan that
permits contributions to a designated Roth account within the plan. Roth 401(k) contributions are made on an after-tax basis,
just like Roth IRA contributions. This means there's no up-front tax benefit, but if certain
conditions are met both your contributions and any accumulated investment earnings on those contributions are free of federal income tax when distributed
from the plan.
Who can contribute?
Anyone! If you're eligible to participate
in a 401(k) plan with a Roth option, you can
make Roth 401(k) contributions. Although you cannot contribute to a Roth IRA if you earn more than a specific dollar amount, there are no such income limits for a Roth 401(k).
Are distributions really tax free?
Because your contributions are made on an
after-tax basis, they're always free of federal income tax when
distributed from the plan. But any investment earnings on your
Roth contributions are tax free only if you meet the
requirements for a "qualified distribution."
In general, a distribution is qualified if:
- It's made after the end of a five-year holding period, and
- The payment is made after you turn 59½,
become disabled, or die
The five-year holding period starts with the year you make your first Roth
contribution to your employer's 401(k) plan. For
example, if you make your first Roth contribution to
the plan in December 2016, then the first year of your
five-year holding period is 2016, and your waiting
period ends on December 31, 2020. Special rules apply if you transfer your Roth dollars over to a new employer's 401(k) plan.
If your distribution isn't qualified (for example,
you make a hardship withdrawal from your Roth account before age
59½), the portion of your distribution that represents investment earnings will be taxable and subject to a 10% early distribution penalty, unless an exception applies. (State tax rules may be different.)
How much can I contribute?
There's an overall cap on your combined pretax
and Roth 401(k) contributions. In 2016,
you can contribute up
to $18,000 ($24,000 if
you are age 50 or
older) to a 401(k) plan.
You can split your contribution
and pretax contributions
any way you
wish. For example, you
can make $10,000 of
and $8,000 of pretax contributions. It's totally up to you.
Can I still contribute to a Roth IRA?
Yes. Your participation in a Roth 401(k) plan
has no impact on your ability to contribute to a
Roth IRA. You can contribute to both if you
wish (assuming you meet the Roth IRA income
What about employer contributions?
While employers don't have to contribute to 401(k)
plans, many will match all or part of your
contributions. Your employer can match your Roth
contributions, your pretax contributions, or both. But
your employer's contributions are always made on a
pretax basis, even if they match your Roth
contributions. In other words, your employer's contributions,
and any investment earnings on those contributions, will be taxed when you receive a distribution of those dollars from the plan.
Can I convert my existing traditional 401(k) balance to my Roth account?
Yes! If your plan permits, you can convert any portion of your 401(k) plan account (your pretax contributions, vested employer contributions, and investment earnings) to your Roth account. The amount you convert is subject to federal income tax in the year of the conversion (except for any after-tax contributions you've made), but qualified distributions from your Roth account will be entirely income tax free. The 10% early-distribution penalty generally doesn't apply to amounts you convert.2
What else do I need to know?
Like pretax 401(k) contributions, your Roth contributions can be distributed only after you
terminate employment, reach age 59½, incur
a hardship, become disabled, or die. Also,
unlike Roth IRAs, you must generally begin taking distributions
from a Roth 401(k) plan after you
reach age 70½ (or, in some cases, after you
retire). But this isn't as significant as it might
seem, because you can generally roll over your
Roth 401(k) money to a Roth IRA if you
don't need or want the lifetime distributions.
1 Plan Sponsor Council of America, 58th Annual Survey of Profit Sharing and 401(k) Plans (2015) (Reflecting 2014 Plan Experience)
2The 10% penalty tax may be reclaimed by the IRS if you take a nonqualified distribution from your Roth account within five years of the conversion.