- Unlike “traditional” 401(k) contributions which are tax-deductible, Roth 401(k) contributions are not tax-deductible in the year you make the contribution.
- Unlike “traditional” 401(k) account balances that are taxable upon distribution from your plan, earnings on your Roth account balance are tax-free when withdrawn – providing the distribution is a “qualified distribution.”
- For a distribution to be “qualified”, two conditions must be met:
- You are over the age of 59 ½;
- The Roth account has existed for 5 years.
- Distribution of Roth contributions are always tax-free. The question is whether the earnings on the Roth balances are taxable or not.
- For a distribution to be “qualified”, two conditions must be met:
Yes, but the total annual contributions of both types cannot exceed the annual dollar limitation in effect for the current year.
- Yes and no.
- Once a contribution has been processed via a payroll, its designation as a Roth or “traditional” contribution cannot be changed.
- Subject to administrative rules regarding the frequency with which you can change the amount of your 401(k) deferrals, you can change how FUTURE contributions are designated as Roth or “traditional”.
- PLANNING TIP: If your plan allows for in-plan conversions, traditional, pre-tax plan balances can be changed to Roth account balances. This conversion is a taxable event and the tax liability must be paid with your annual tax return.
No, all employer contributions will be subject to taxation when withdrawn from the account.
- YES, if one of the following applies:
- You are paying no income taxes.
- You are in a low tax bracket and expect in future years to be in a higher tax bracket.
- You think your income tax rate at retirement will be higher than it currently is.
- The tax-deduction for a “traditional” 401(k) contribution is unimportant to you.
- You are in a high tax bracket and want to maximize the after-tax income you will have during retirement.
- NO, if one of the following applies:
- The tax deduction for a “traditional” 401(k) contribution is important to you—and the deduction helps you to make a larger 401(k) contribution.
- You will be in a lower income tax bracket during retirement.
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