What is Roth 401k
What is Roth 401k

What is Roth 401k – Have you ever heard about Roth IRA 401k? Whatever your answer may be, Roth 401k is a retirement savings plan that features the combination of Roth IRA and traditional 401(k). This package was designed by the United States government to help retirees have something to fall back on after leaving their job. It is interesting to plan the future early and most importantly, to make the best choice and plan. Interestingly, the Roth 401k can grow tax-free after you have been charged taxes on the money put in and you enjoy a tax-free withdrawal as well. In this article, we’ll provide you with all you need to know about Roth 401k.


If you know you will be in a higher tax bracket after you retire then, Roth 401k is for you. This will help you because of its various featured package carved out from the Roth IRA and the traditional 401(k) plan. However, there is a limit on how much you can contribute, meaning that your contribution to Roth 401k is limited based on your age. Roth 401k is simply the segment of the IRS code that allows you (employees) to contribute your own money to your employer’s profit-sharing plan.

  • How Roth 401k works

Still on What is Roth 401 and possibly how does it work? These are important questions to ask because it is important that one has a foreknowledge about what you are putting your money into before you do.

When you contribute to a Roth 401k, the contribution doesn’t reduce your present tax income, but in the future when you eventually make withdrawals from your account, and it’s completely tax-free just like the Roth IRA. More so, there are no penalties on tax when you make withdrawals from Roth 401k when you’re age 59½ and above but have met the five-year rule.

You may have earnings over 20 or 30 years, and you will never pay taxes on these dollars.

To know more about Roth IRA 401k, read some of the interesting facts below, and you will see why Roth 401k is better than traditional 401k and Roth IRA.

  • No Income Limitation on Roth 401k

Income limitation is not an excuse why you can’t contribute or have a Roth 401k saving account. This gives it an edge over Roth IRA that has a contribution limit of $6000 and $7000 in 2019, especially if you are at the age of 50 and over. More so, the limitation can be reduced or totally removed based on the MAGI (modified adjusted gross income) phase-out range.

Again I repeat there is no income limitation on Roth 401k and in fact the contribution limit is higher than the Roth IRA. Thus, if you are unable to contribute to a Roth IRA, then you should opt for Roth 401k which is a much better plan.

  • You will Enjoy Tax-Deferred Funds

One of the best parts of Roth 401k is that there are several funding sources. Since Roth 401k allows employees to contribute their own money to their employer’s profit sharing plan and the regulations, require the source of funds in a profit sharing plan be tracked and accounted for. Therefore, the sources of funds should be fragmented between employee contributions (salary deferral), company matching contributions, and profit sharing contributions upon getting your retirement plan statement.

  • Required Minimum Distributions (RMDs)

Required Minimum Distributions means that individuals can begin withdrawals from their retirement plans when they reach age 701/2, which is in line with the IRS rules. However, Roth 401k is subjected to this rule, unlike the Roth IRAs that are not. Thus, except you convert your Roth 401k to a Roth IRA, you will be subject to the RMD rules.

  • Roth 401k Contribution Rules

Despite the flexibility provided for Roth 401k, there are still some rules that you need to follow and adhere to so that, you will not be penalized or fined breaching any of the laid down rules.

  1. Presently, the annual contribution limit is $19,000 (increased from $18,500 in 2018), or $25,000 (due to an additional $6000) for employees that are age 50 or older.
  2. When you are at least age 59 ½ years old
  3. You must have held the account for a minimum of five years.
  4. You can also make a withdrawal on account of been disabled, on or after the death of an account owner.
  • Withdrawal Rule for Roth 401k

Withdrawing your Roth 401k contribution is not tedious as long as you meet certain conditions.

  1. The account holder must have kept the account functional by active contribution for a minimum of at least five years.
  2. The account holder should either be age 591/2 years and older, deceased, or completely disabled. In the advent of the account holder been deceased, the fund goes to the deceased beneficiary.
  3. The account holder should be 701/2 or retires to qualify for required minimum distributions. The reason has been that Roth accounts are funded with after-tax money and you don’t need to pay income tax on qualified distributions, all the same; you would still report them to the IRS using Form 1099-R when filing your taxes.
  4. In the case whereby the account holder owns 5% or larger share of the employing company, the distribution must begin at age 701/2 irrespective of the employment status.
  • Unqualified Withdrawal

There is what is called unqualified withdrawal, which is applicable to holders of Roth 401k account. Withdrawals tend to be labeled unqualified when the contribution has been taken out of a Roth 401k account that does not meet the withdrawal rule, and it incurs income taxes.

  • How to Enroll for Roth 401k

To enroll for Roth 401k is not tedious. You can enroll as an employee, all you need do is to speak to your employer and inquire if they allow Roth 401k contributions. If they do, good for you, but if not and you are interested in contributing or opening a Roth 401k account, don’t keep shut but go ahead and express your interest to your employer. This is because not every employer plans cover this option but tend to include it in their plan when many employees are requesting for it.

Also, you can enroll as a business owner having employees. You can incorporate a Roth 401k contribution plan into your business so that you and your employees can enjoy the benefit thereafter.

In addition, if you are a sole business person (self-employed), you are not left out because you can also open the Roth 401k account. The account for a self-employed plan is known as the “Individual (k)” or Solo (k) plan.

  • Differences between Roth 401k and Roth IRAs

There are differences between the Roth 401(k) and a Roth IRA. As such, they should not be confused to be the same thing or offering the same package, the major differences are

  1. Income limitations

This is one of the big difference between Roth 401k and Roth IRAs. If you earn too much money or make surplus income, you are not qualified to contribute to a Roth IRA. But this is not the case with Roth 401k because there is no such income limitation for Roth 401k contributions. This means that you are able to contribute as much as you want without any limitation.

  1. Contribution Limits

Another difference observed between Roth 401k and Roth IRA. For Roth 401k, the maximum contribution amount is much higher than that of Roth IRA; this implies that you will be able to save more, and you will enjoy tax-free investment growth and distributions in your retirement years.

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Conclusion on What is Roth 401k- Guide You Need to Read

I believe we have answered your question about What is Roth 401k. There are many reasons why you should opt for a Roth 401k either from traditional 401k, Roth IRAs or you are just starting. Roth 401k plan is good and if your employer makes provision for it, don’t hesitate but go for it. As you are preparing for your retirement plan be it now or in the future, one of the item to be on the list should be a Roth 401k account. Therefore, knowing that Roth 401k will let you enjoy spending in the future without having to pay tax on your withdrawals, then search no further but make use of this opportunity.

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