What exactly is a Roth 401(k) contribution?

  1. Unlike “traditional” 401(k) contributions which are tax-deductible, Roth 401(k) contributions are not tax-deductible in the year you make the contribution.
  2. 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balances that are taxable upon distribution from your plan, earnings on your Roth account balance are tax-free when withdrawn – providing the distribution is a “qualified distribution.”
    1. For a distribution to be “qualified”, two conditions must be met:
      1. You are over the age of 59 ½;
      2. The Roth account has existed for 5 years.
    2. Distribution of Roth contributions are always tax-free. The question is whether the earnings on the Roth balances are taxable or not.

Can I make both a Roth contribution and regular 401(k) contribution?

Yes, but the total annual contributions of both types cannot exceed the annual dollar limitation in effect for the current year.

Can I change my mind about making my contribution as Roth or “traditional”?

  1. Yes and no.
    1. Once a contribution has been processed via a payroll, its designation as a Roth or “traditional” contribution cannot be changed.
    2. 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”.
  2. 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.

Can I designate my Employer’s contributions as Roth contributions?

No, all employer contributions will be subject to taxation when withdrawn from the account.

Should I make a Roth contribution?

  1. YES, if one of the following applies:
    1. You are paying no income taxes.
    2. You are in a low tax bracket and expect in future years to be in a higher tax bracket.
    3. You think your income tax rate at retirement will be higher than it currently is.
    4. The tax-deduction for a “traditional” 401(k) contribution is unimportant to you.
    5. You are in a high tax bracket and want to maximize the after-tax income you will have during retirement.
  2. NO, if one of the following applies:
    1. 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.
    2. You will be in a lower income tax bracket during retirement.