A Roth 401(k) combines a Roth IRA and a 401(k) and is offered by employers with contributions from the employee’s paycheck. It is an employer-sponsored investment savings account that is funded by the employee’s paycheck.
A Roth 401(k) is suitable for individuals who anticipate being in a higher tax bracket at retirement than they are now. This is because withdrawals from a Roth 401(k) are not taxed.
The money is then invested in suitable investment products that meet the contributor’s needs. The Roth 401(k) was launched in 2006, and since then, it has seen significant growth in its membership. Money in a Roth 401(k) is not taxed even when you withdraw at retirement.
Roth 401(k) Contribution Limits
A Roth 401(k) is subject to contribution limits determined by the individual’s age. Generally, a Roth 401(k)’s contribution limits are similar to those of a regular 401(k). One can contribute up to $18,500 to a Roth 401(k). Those who are aged 50 years and above are allowed to contribute an additional $6,000.
Like noted above, withdrawals from a Roth 401(k) account are not taxed as long as it is a qualified distribution. This provision is subject to terms and conditions. The account must be at least five years old. In addition, the withdraws must be made on an account whose holder has reached at least age 59½.
Distributions are required for members who are aged at least 70½ years old unless they are still working with the employer where they opened the 401(k).
A Roth 401(k) mainly benefits individuals who are currently in a lower tax bracket but anticipate moving to a higher bracket in the future. Contributions to a Roth 401(k) are taxed at a lower tax rate while distributions are not taxed when the account holder is in a higher tax bracket.
For younger individuals, a Roth 401(k) may be a good opportunity to grow your account tax-free before retirement. A Roth 401(k) is not suitable for an individual who expects to drop tax brackets, for instance, if you are nearing retirement and expect a drop in income.