Roth 401(k) [Post 13]

What is a Roth 401(k)?

For starters, a 401(k) is an employer sponsored retirement plan where an employee contributes to an investment account directly from their paycheck. Many employers offer a Traditional and Roth 401(k).

The Roth option allows you to pay taxes on the money going in at your marginal tax rate instead of paying taxes on withdrawals later. Advantages of the Roth option include tax-free growth and tax-free future distributions (if you follow the guidelines).

Who should elect Roth?

• Those early in their career that anticipate being in a higher income bracket in the future.

• Those with a long-time horizon that would benefit from tax free investment growth.

• Those in a lower-than-normal earning year that want to pay tax in a lower current bracket.

A Roth vs Traditional 401(k) calculator1 can be helpful in making the decision for which account(s) to utilize with your employer. Explanations for tax rates are provided in the calculator but most people should expect their marginal rate to be 12%, 22%, or 24% depending on your taxable income.

Things to Know – Roth 401(k) in 2023

• You need earned income to contribute.

• Distributions can be made without penalty for anyone 59 ½ or older and have held the funds in the account for 5 or more years.

• Contributions are limited to $22,500 if under age 50.

• There is no individual income limit.

• Funds can be bought and sold inside the account without tax consequences.

• If you have multiple investment accounts, consider placing your highest expected returning investments to your Roth account since you don’t pay taxes on growth.2

Summary

Anyone early in their career, with a long-time horizon to retirement, or finds themselves in a lower-than-normal earning year should consider contributing to a Roth 401(k) if possible.

Don’t have a 401(k)? A Roth IRA is an alternative.

1) https://www.citizensbank.com/investing-and-wealth-management/products-services-and-calculators/financial-calculators/roth-401k-vs-traditional-401k-calculator.aspx

2) Kagan, J. (2023, March 5). What is a Roth 401(k). Investopedia. https://www.investopedia.com/terms/r/roth401k.asp