Roth 401(k) Basics
Elective deferral contributions to a traditional 401(k) plan are contributed on a pre-tax basis and help lower your current taxable income. Roth elective deferral contributions, however, are much like a Roth IRA in that contributions are made on an after-tax basis. Money in the Roth account and any earnings will be distributed tax free if withdrawn after age 59½, death, disability, AND after the 5-year taxable period during which the participant’s deferral is first deposited into the Roth 401(k) account (a.k.a. the Five Year Rule). A Roth 401(k) account can be rolled over to another plan that permits Roth 401(k) contributions or to a Roth IRA. If rolled into a Roth IRA, the tax-free nature remains and the money is not subject to the minimum distribution requirement at age 70½ as in the Roth 401(k).
Who Would Likely Benefit?
- People who believe taxes will be greater in the future
- Young investors who believe they will be in a higher tax bracket in the future
- Investors who do not qualify for the Roth IRA due to income limit
- Low income investors who are tax-exempt
- Investors who use Roth 401(k) as a planning tool in conjunction with traditional 401(k) plans
- Allows participants to “hedge” against risk of higher future tax rates
Who Would Likely Not Benefit?
- People certain that future tax rates will decrease
- People expecting to experience a significant drop in income upon retirement
- People with high temporary income
- People needing access to their funds within the first five years of deferrals
*Assumes the Five Year Rule has been met
In summary, Roth 401(k) contributions have potential to allow individuals more flexibility in saving for retirement, whereby giving investors more control over the taxable alternatives. Summit Group of Virginia recommends a cautious approach when weighing the pros and cons.
Securities and investment advisory services are offered solely through Ameritas Investment Corp. (AIC). Member FINRA/SIPC. AIC and Summit Group of Virginia LLP are not affiliated. Additional products and services may be available through Summit Group of Virginia LLP that are not offered through AIC. Representatives of AIC do not provide tax or legal advice. Please consult your tax advisor or attorney regarding your situation.
