Q. How is the Roth
401(k) different than the traditional 401(k)?
A. The most significant
difference is the tax treatment of contributions and withdrawals.
With a traditional 401(k), employee contributions go into the plan
pre-tax and any distributions at retirement are considered taxable
income. For the Roth 401(k) the reverse is true as contributions
are made on an after-tax basis and the distributions are made free
of any federal income tax.
Q. Are the contribution
limits different between the traditional 401(k) and Roth 401(k) accounts?
A. No. The limits for
2015 are $18,000 with an additional $6,000 “catch-up”
contribution available to those who are age 50 and above. The total
contribution amount of $18,000 (or $24,000) can be allocated between
the two types of plans as long as the combined contribution amount
does not exceed the stated limit.
Q. Are transfers
allowed between the traditional 401(k) and Roth 401(k) accounts?
A. Generally, once contributions
have been designated to the traditional 401(k), assets cannot be
transferred to the Roth 401(k) account. However, certain
companies provide an in-plan Roth conversion option.
If there is an employer match, how is
A. While employees can
choose to allocate their contributions to either type of plan, any
employer match must be done on a pre-tax basis. For that reason
all employer match contributions would be made into the participants
traditional 401(k) account.
Q. How long before
the assets in the Roth 401(k) are available, tax-free?
A. Generally, the assets
must remain in the account for 5 years. In addition, the employee
must be at least 59½ to take withdrawals tax-free.
Q. Is the traditional 401(k) or
the Roth 401(k) better?
A. It depends on the
current and future tax rate for the participants. If your tax rate
in retirement will be the same as your current tax rate, then both
plans will produce the same amount of after-tax income. If your
tax rate will be lower in retirement, then the traditional plan
would be better. If your tax rate in retirement will be higher,
then the Roth 401(k) makes more sense.
Q. What other factors
will make a difference?
A. Keep in mind that
whatever tax rate prevails at retirement, you would still be receiving
tax-free income from a Roth 401(k). This fact alone could make a
significant difference in your total taxable income, which in turn
will determine your tax bracket. In addition, tax-free income payments
from your Roth 401(k) will have no impact on the taxability of Social
Q. What are the rules
on Required Minimum Distributions (RMD)?
A. While there are no
RMD rules governing Roth IRA distributions, the same is not true
for Roth 401(k) assets. These rules apply in the same way as they
do for traditional 401(k) assets, where you must start taking distributions
at age 70½. A strategy to avoid RMDs would be to roll the
Roth 401(k) to a Roth IRA before age 70½ .
Q. Is there a limit
on how long Roth 401(k) plans might be available?
A. The guidelines governing
these plans are part of the Economic Growth and Tax Relief Reconciliation
Act of 2001 (EGTRRA). The EGTRRA provisions were scheduled to
end after 2010. However, the Roth 401(k) provision was made permanent under the Pension Protection Act of 2006.
Q. Are employee loans
available from a Roth 401(k)?
A. An employee’s Roth
and Traditional 401(k) account balances would be combined for purposes
of applying the plan loan rules. Those rules allow for a loan of
50% of the vested account balance with a $50,000 limit.
Q. If someone is
not eligible for a Roth IRA, are they eligible for the Roth 401(k)?
A. Yes. Some participants
are prevented from making contributions to a Roth IRA because their
Modified Adjusted Gross Income (MAGI) exceeds certain levels. The
Roth 401(k) does not carry any income level requirements. Everyone
who participates in a plan that offers a Roth 401(k) as an option can make
use of the Roth 401(k) provision.
Q. When heirs inherit
a Roth 401(k), what will the tax treatment be?
A. Any distributions,
or allowable rollovers, would be considered free of any federal
income tax. This does not include any liability that may
be incurred for applicable estate taxes.
Q. What are the rollover
options for a Roth 401(k) account?
A. A direct transfer
from one Roth 401(k) plan to another would be allowed if
permitted by the plan administrator. In addition,
upon separation of employment or retirement, a participant would
be able to roll their Roth 401(k) balance into a Roth IRA.
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