An increasingly common 401(k) feature in recent years has been the option for Roth 401(k) contributions within this popular workplace retirement plan. A Roth 401(k) has many of the same characteristics of its close relative - the Roth IRA. Both feature contributions that are after-tax and earnings grow tax-free. That quickly brings us to the differences.
The Roth 401(k) has the benefit of a much higher contribution limit - $20,500 in 2022 versus $6,000 for a Roth IRA (and for those over 50 the limit is $27,000 into a Roth 401(k) vs. $7,000 for a Roth IRA). That is over 3 years of Roth IRA contributions allowed to a Roth 401(k) in a single year!
There are also income limitations to pay attention to. Roth IRA contributions are not allowed once your Modified Adjusted Gross Income (MAGI) is $144,000 or more for those filing single, and $214,000 for joint filers. When it comes to income limits for Roth 401(k) contributions...wait, there are none! Yes, you read that correctly - you can make Roth 401(k) contributions no matter what your income is. That is another major difference from Roth IRAs that is often overlooked. This makes Roth 401(k)s a fantastic way to put money in a Roth treated account, even at higher income levels.
It’s also important to keep in mind that generally 401(k) plans allow you to contribute to either the Traditional or the Roth 401(k) - or a combination of the two. This means you can contribute to either option in any combination you want, as long as your total contributions are within the $20,500 limit for 2022 ($27,000 for those age 50 or older). Often, we find mixing contributions across these two options can make the most sense, but of course every situation is different and lots of variables should be taken into account:
- Current age?
- Current income level?
- Projected income levels in the future?
- Do you want to pay more taxes now or pay later?
- Current mix of investment and retirement accounts?
We invite you to contact the team at Stonegate for a closer look at how you might take advantage of a Roth 401(k) and maximize where to save your hard-earned investment dollars for today and tomorrow.
Any opinions are those of Alex Greene and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
Roth 401(k) plans are long-term retirement savings vehicles. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72.