Roth 401(k) Plans

Roth 401(k) Plans

A new retirement account was signed into law on August 17, 2006. It is a component of a “regular” 401(k) plan; however, the funding of a “Roth” 401(k) plan is with AFTER-TAX dollars. This is similar to the Roth IRA but with higher funding limits and no limit on earnings to contribute. Money contributed to a Roth 401(k) plan grows without tax and is distributed without tax. You have until April 15th of each year to make a contribution for the previous year. The funding limit for 2020 (and 2021) is $19,500, or $26,000 if over the age of 50.

Ask yourself the following question: Will you grow more wealth funding a Roth 401(k) in a non-deductible manner where the money grows then comes out income tax-free, or will you grow more wealth income-tax deferring money into a traditional 401(k) where the money withdrawn is fully income taxable at your current income tax bracket?

The answer is… it depends. The real-world answer about Roth plans is that many readers may in fact be better off using Roth Plans over traditional income tax-deferred plans.

Who should use a Roth 401(k)?

• Anyone who will be retiring in the same or higher tax bracket.
• Anyone who will be retiring in a tax bracket within 10% of their current tax bracket.