A Roth 401(k) is an employer-sponsored investment savings account which the employee’s paycheck funds. Employers offer a Roth 401(k) that combines a Roth IRA and a 401(k).
Anyone who is anticipating a higher tax bracket at the time of retirement can opt for A Roth 401(k) as you do not need to pay any tax for the withdrawals from a Roth 401(k).
Launched in 2006, the Roth 401(k) has earned a prominent growth in its membership. As the money withdrawn at the retirement is not taxable, you can invest it on any investment option that meets your needs.
Contribution Limits of Roth 401(k)
The contribution limits of a Roth 401(k) depends on the individual’s age. Usually, a Roth 401(k)’s contribution limits do not differ from a regular 401(k). You can contribute up to $18,500 in a Roth 401(k). If you have already crossed 50 years, you are allowed to contribute an additional $6,000.
As stated earlier, no tax is levied on the withdrawals from a Roth 401(k) account until it is a qualified distribution. However, this provision is subject to terms and conditions. You must have at least a five years old account. Moreover, the withdrawals should be made only after the holder has aged 59½ years old.
You may require distributions if you are aged at least 70½ years old unless you are holding on with the same employer where you opened the 401(k).
If you are someone who is moving from the lower tax bracket to a higher one or you may have chances of so in the future, a Roth 401(k) may significantly benefit you.While Contributions are taxable at a lower tax rate while distributions are non-taxable even when the Roth 401(k) account holder falls in a higher tax bracket.
If you are just starting off your career, a Roth 401(k) can be the golden opportunity to ensure a tax-free account before retirement. However, a Roth 401(k) is not recommended for someone who is expecting a drop in tax brackets, i.e, if you expect a drop in income while nearing retirement.
