Is the Roth 401(k) Option Right for your Plan?

Beginning in 2006, 401(k) Plan Sponsors had the option to allow employees to make after-tax or "Roth" contributions.  Following are a few questions and answers on how this option can be used.

  • Is the Roth 401(k) a separate plan from the Plan Sponsor's current plan?  No. The Roth 401(k) is an optional feature of the Sponsor's existing Plan.

  • What is a Roth contribution?  A Roth contribution is an employee salary deferral made with after-tax compensation.

  • How does a Roth 401(k) differ from a traditional 401(k)?  A traditional 401(k) is funded by pre-tax salary deferrals and the participant pays tax on the accumulation when withdrawing the funds at retirement.  Whereas, a Roth 401(k) is funded with after-tax contributions, and the participant does not pay tax on the accumulation when they withdraw the funds at retirement.  A participant must be at least age 59-1/2 and have the Roth source funded for at least 5 years before they can take Roth distributions without penalty.

  • What is the individual annual limit for the Roth 401(k)?  The limit for 2018 is $18,500 for the participants under the age of 50, and $24,500 for participants age 50 or older

  • Can a participant fund $18,500 to both the traditional 401(k) and the Roth 401(k)?  No. The participant has one $18,500 limit ($24,500 if age 50 or older).  However, the participant may choose to split that limit between a traditional 401(k) contribution and a Roth 401(k) contribution.

  • Are Roth contributions subject to the same non-discrimination tests as the traditional contributions?  Yes. The same non-discrimination tests apply to Roth contributions as well as traditional contributions.

  • Can a participant receive an employer match on Roth contributions?  Yes.  The fact that the contribution is a Roth contribution does not affect the employer match.

  • Do beneficiaries of a Roth 401(k) pay any taxes?  No. The beneficiaries receive the funds tax free.

  • How does the participant determine which type of contribution would be better for them?  There are many factors that go into deciding whether the contribution should be Roth or traditional.  For example, the participant's current tax bracket, age, and/or years remaining until retirement. To assist in this decision, see the link below containing a calculator comparing Roth 401(k) with a traditional 401(k) saving plan.

  • Roth 401(k) versus Traditional 401(k) calculator