Roth 401k Retirement Planning

401K Roth Retirement Planning Basics

In 2006, U.S. Congress made the Roth 401k a permanent fixture on the financial scene when it passed the Pension Protection Act. Originally created in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Roth 401k began as a temporary measure. Congress modeled the new 401k after the Roth IRA, so the sibling account types share some features.

Who Can Open a Roth 401k?

Not everyone can open a Roth 401k since it’s an employer-sponsored investment savings account. If your employer offers this option, it can work with other accounts you may have already opened, such as a 403b or traditional IRA.  If your employer offers both a Roth 401k and a traditional 401k, you can open both accounts and contribute to them both. You must adhere to the caps and can’t exceed 100% of the participant’s compensation for the year or the federal annual cap, whichever is lower.

When You Pay Taxes on the Money

You’ll pay taxes on money when you fund a Roth 401k because it uses an employee’s after-tax money. It doesn’t offer the tax breaks that some investment options do. However, during retirement, you won’t pay taxes on disbursements from your Roth 401k.

When You Can Use Money in a Roth 401k

Unlike many types of retirement accounts, you can withdraw from this 401k at an early age without a penalty. An account holder can make tax-free withdrawals after age 59½ as long as their 401k has been funded for at least five years. Unlike a Roth IRA, you must take required minimum distributions (RMDs) from a Roth 401k when you reach age 73 or 75, depending on your year of birth.

Roth 401k Account Contribution Caps

Just like other types of retirement accounts, the Internal Revenue Service (IRS) caps the amount you can make in contributions each year. The IRS updates this amount annually, also providing higher catch-up contribution caps for individuals 50 years old and older. The caps for a Roth 401k let you save more than a Roth or traditional IRA each year.

Who 401k Roth Retirement Planning Benefits

Of course, a 401k Roth account won’t make the perfect choice for every investor. Watch this Pathfinder Retirement video to learn how Roth 401k retireent planning compares with saving using an IRA. It could offer you long-term benefits if you currently pay low taxes, or you expect to pay higher taxes when you retire.

Summing It All Up

Although you don’t get the tax deduction a traditional 401k provides while you save for retirement, the Roth 401k delays its benefits until your retirement with tax-free withdrawals. If your employer offers a traditional 401k or 403b and a Roth 401k, you can open any or all of them.

Let Pathfinder Retirement help you plan your retirement accounts and investments. Contact one of our knowledgeable financial advisors to create the most beneficial retirement plan for you using our holistic approach.