4 Things You Should Know About Roth 401(k) Accounts

A Roth 401(k) is a powerful retirement savings tool that combines the benefits of a traditional 401(k) with the tax advantages of a Roth IRA. If you're considering contributing to a Roth 401(k) or already have one, it's important to understand how this type of account works and how it differs from other retirement savings options. Here are four key things you should know about Roth 401(k) accounts.

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1. Tax Treatment: Pay Now, Enjoy Later‍

One of the key features of a Roth 401(k) is its tax treatment. Contributions to a Roth 401(k) are made with after-tax dollars, meaning you pay taxes on your income before contributing. The major benefit comes in retirement: qualified withdrawals are completely tax-free, including any earnings on your investments. To qualify for tax-free withdrawals, you must be at least 59½ years old and have held the account for at least five years.

This "pay now, enjoy later" structure may be appealing to individuals who expect to be in a higher tax bracket in retirement, as it allows for tax-free withdrawals.

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2. Contribution Limits: Generous Room to Save

Roth 401(k) accounts share the same contribution limits as traditional 401(k) plans, allowing you to take full advantage of their higher limits compared to Roth IRAs. For 2024, individuals under 50 can contribute up to $23,000. Those 50 or older can make an additional catch-up contribution of$7,500, allowing for a total contribution of $30,500.

These higher limits provide the ability to save more for retirement, with the added benefit of future tax-free withdrawals.

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3. Employer Matching: Separate from Your Roth Contributions

One unique aspect of a Roth 401(k) is how employer matching works. If your employer offers a matching contribution, it will be made to a traditional 401(k) account, not your Roth 401(k), even if all your personal contributions go into the Roth portion. This means that while your contributions grow tax-free, your employer’s match will grow tax-deferred, and you’ll owe taxes on those matched contributions when you withdraw them in retirement.

This separation of employer matching and personal contributions is important to consider when planning your retirement tax strategy.

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4. No Required Minimum Distributions(RMDs) Starting in 2024‍

A big update from the SECURE 2.0 Act: Starting in 2024, Roth 401(k) accounts are no longer subject to Required Minimum Distributions (RMDs). Previously, Roth 401(k) accounts had the same RMD rules as traditional 401(k)s, requiring you to withdraw a certain percentage of your savings each year starting at age 73. However, the new law eliminates RMDs for Roth 401(k)s, aligning them with Roth IRAs, which have never had this requirement.

This means you can leave your savings in the account to continue growing tax-free for as long as you like, without being forced to take distributions during your lifetime. This change allows savings to grow tax-free for a longer period, without mandatory withdrawals during the account holder’s lifetime.

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Conclusion‍

A Roth 401(k) is a flexible and tax-efficient retirement savings option that offers several key benefits, A Roth 401(k) is a flexible and tax-efficient retirement savings tool that offers several key benefits, including tax-free withdrawals, high contribution limits, and, starting in 2024, no required minimum distributions. Understanding how these features work can help individuals make informed decisions about their Roth 401(k).

By utilizing the Roth 401(k)'s unique tax treatment and employer matching benefits, individuals may build a tax-free retirement portfolio that offers you greater financial freedom when you retire. Consult with a financial planner or CPA to determine if this strategy aligns with your retirement goals.