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The Roth 401(k)/403(b) Contribution Option

Roth 401k 403b Contribution Options

Posted: Nov 30, 2015 | Author: | Comments: 0

Beginning in 2006, some employers began offering a Roth contribution option to employees who participate in the employer’s 401(k)/403(b) plan. This unique option allows the participant to make after-tax contributions to the plan, later taking the contributions and associated earnings completely tax-free at retirement if the withdrawal is a qualified one. To qualify, the withdrawal must be taken five tax years after the year of the first Roth contribution and the participant being age 59½ or older, becomes disabled or dies.

It is important to note that the Roth 401(k)/403(b) contribution option is not the same as a Roth IRA contribution option. There are several differences between a Roth 401(k)/403(b) and a Roth IRA, including:

  • Participants can contribute to a Roth IRA if his or her modified adjusted gross income falls below a certain amount
  • A Roth IRA is a separate account from the participant’s retirement savings plan. Roth 401(k)/403(b) contributions are part of a participant’s 401(k)/403(b) retirement savings plan
  • With a Roth IRA, participants are not required to take a minimum distribution during his or her lifetime. With a Roth 401(k)/403(b), participants are required to take a minimum distribution, generally after retiring and attaining age 70½.
  • Contributions made to a Roth 401(k)/403(b) option are not specifically eligible for a tax-free distribution for the purchase of a participant's first primary residence. Roth IRA contributions are.

Are There Contribution Limits?

Beginning in 2015, participants who are 50 years or older can contribute up to $6,500 to a Roth IRA per year. Participants of traditional 401(k)/403(b) plans and participants of Roth 401(k)/403(b) plans who are under age 50 can contribute up to $18,000 in 2015. Those over the age of 50 can contribute an additional $6,000.

Who Will Benefit Most From a Roth 401(k)/403(b) Plan?

A Roth 401(k)/403(b) will best benefit:

Participants who expect to be in a higher tax bracket in retirement

Younger employees who have longer to save for retirement under a Roth plan

Individuals who are highly compensated and want a pool of tax-free money to draw upon after retirement, but who are not eligible for Roth IRAs due to income limitations

Those who want to leave tax-free money to heirs in the future

Participants who are over age 50 may be eligible to make catch-up contributions. The combined IRS contribution limit for both Roth 401(k)/403(b) and traditional 401(k)/403(b) pre-tax contribution is $24,000 for these individuals. It is important to note that the amount of Roth 401(k)/403(b) and traditional pre-tax contributions a participant is able to contribute may also be subject to specific plan limits.

If you think a Roth 401(k)/403(b) plan may be the most beneficial option to ensure financial security during retirement, you should learn more about these options at Ed4Ed.org. Here, experts have gathered the most current information on retirement pension plans and additional savings plans for participants of CalSTRS and CalPERS pension plans. It is important to stay informed on your retirement options, and Ed4Ed.org can help.