Questions & Answers on Roth 401(k)s

A Roth 401(k) plan is simply a traditional 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?
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 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 591/2, 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.

If your distribution isn’t qualified (for example, you make a hardship withdrawal from your Roth account before age 591/2), the portion of your distribution that represents investment earnings will be taxable and subject to a 10% early distribution penalty, unless an exception applies.

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 between Roth and pretax contributions any way you wish.

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.

What about employer contributions?
Many employers will match all or part of your contributions. Your employer can match your pretax contributions, your pretax contributions, or both.

Can I convert my existing traditional 401(k) balance to my Roth account?
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.

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 591/2, incur a hardship, become disabled, or die. Unlike Roth IRAs, you must generally begin taking distributions from a Roth 401(k) plan after you reach age 701/2 (or, in some cases, after you retire).

 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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