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Q.What is a Roth 401(k)?
A.A Roth 401(k) is not a new type of plan. As of 2006, the Revenue and Taxation Code permits new and pre-existing 401(k) plans to amend their plan to adopt a feature allowing employees to make designated Roth contributions. In other words, the IRS now allows 401(k)s to accept Designated Roth Contributions. With a traditional 401(k), the employee invests pre-tax dollars which grow tax free, and the taxes are paid upon withdrawal. With a Roth 401(k) contribution, the employee pays the taxes up front on his or her income, the after-tax dollars contributed grow tax free and are withdrawn tax free.
One advantage to such a plan, is the employee can elect to make a contribution up to $15,500 ($20,500 if 50+) in any proportion to a designated Roth account and a traditional, pre-tax account. However, if the employer matches, the employer’s contribution must be made to a traditional, pre-tax account as opposed to a Roth.
IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained on this web site is not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed on a taxpayer under the U.S. Internal Revenue Service.
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