Roth 401(k) Essential Information

Adding a Roth feature to a 401(k) plan allows business owners and employees the option to pay taxes now contributions and at today’s tax rates. Unlike traditional pretax 401(k) contributions, Roth 401(k) contributions are made with after-tax dollars.

If you make Roth 401(k) contributions, when you take money out of your 401(k), the Roth contributions and the investment earnings will be distributed tax-free if you meet specific requirements.

Roth 401(k) is a significant advantage for those who are concerned about tax changes that may occur in the future that involves a different political landscape. With a Roth 401(k), individuals and employers will not be taxed on an uncertain tax future.

When Roth 401(k) contributions are distributed, you do not have to include this money in your taxable income because you already paid taxes in the year you made the contribution.

Two requirements must be met for a Roth distribution to be qualified:

• You must have had a Roth 401(k) account for at least five years, and
• You are age 59½, have become disabled, or have died

If a distribution from a Roth 401(k) is not qualified, the earnings portion of the distribution (but not the Roth contributions) will be taxable. The earning may also be subject to a 10% early distribution tax if you are younger than age 59½ unless a penalty exception applies. Aside from the special taxation rules, Roth contributions are subject to the same distribution rules that apply to your pretax money.

That is, you generally cannot access your 401(k) savings until you have a distributable event (such as no longer working for the employer).

If you keep money in your 401(k) after you retire, you will be required to take required minimum distributions (RMDs) from your Roth 401(k) account as well as your pretax 401(k) account.