Americans concentrated on saving for retirement may want to consider investing in a Roth 401(k) plan, which has a blend of features from the more familiar traditional 401(k) and IRA accounts.
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Workplaces began offering Roth 401(k) retirement plans in 2006, but they differ from traditional 401(k) accounts in a few important ways.
Unlike a traditional 401(k), contributions to a designated Roth 401(k) are made with after-tax dollars. That means qualified withdrawals will not be taxed – so long as the funds are held for at least five years and withdrawn after an individual turns 59.5.
There is a catch, however. If your company matches your contributions, those will be made with pre-tax dollars. That means this portion of your withdrawals will be subject to taxes.
There is no income limit for participants.
Like traditional 401(k) investors, people with Roth 401(k) accounts are subject to required minimum distributions, which begin at age 72 (age 70.5 if that age was reached before Jan. 1, 2020).
The aggregate employee elective contribution limit for 2020 is $19,500. The additional catch-up contribution allowance for individuals over the age of 50 is $6,500.
Participants are able to contribute to both a traditional and a Roth 401(k) account simultaneously, but cumulative contributions cannot surpass the set annual threshold.
About 70 percent of employers offer the option to contribute to a Roth 401(k), but only slightly more than one in five workers take advantage of it.
The benefits of contributing to a Roth 401(k) may be amplified for those who assume they will be in a higher tax bracket – or have a higher tax rate in general – when it comes time to withdraw funds in retirement.