The Roth Option for 401(k) Plans
To attract and retain valuable employees, employers may offer an array of employee benefit options.
Employers that offer 401(k) plans now have a new benefit to consider: adding a Roth contribution to their plan.
A Simple Concept
Having a Roth account in a 401(k) is similar to having a Roth individual retirement account (IRA).
- Participants contribute money that has already been taxed.
- Earnings accumulate tax free.
- Withdrawals are tax free, as long as certain requirements are met.*
There are differences:
- Roth contributions are deducted as wages by employers, and all applicable withholding requirements apply.
- The annual dollar limit on 401(k) salary deferrals applies. The limit is for combined Roth and regular 401(k) contributions.
What’s the Attraction?
Congress felt that allowing employers to add a Roth feature to their 401(k) plans would allow more people to take advantage of the tax benefits of Roth-type accounts. The annual Roth IRA contribution limit is fairly low compared to the limit for 401(k) plans.
There are also income restrictions on Roth IRAs. No such limit applies to Roth 401(k)s. So, being able to make a Roth 401(k) contribution might be something for high-income earners to consider.
Young workers who are still in a relatively low tax bracket might also find the Roth option attractive.
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If you would like to find out more about our business retirement plan services and how they can benefit you and your employees, please give us a call.
*Participant must be age 59½ or older and have been making contributions to a Roth account for five years or more. Withdrawals after five years due to death or disability are also tax free.
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