Roth 401Ks are becoming increasingly popular in the American workplace. My present employer offers the Roth 401K, and before signing up for one, I had a lot of questions about them. In this post, I’ll cover Roth 401K basics and do some comparisons between the Roth and a Traditional 401K.
What is a Roth 401K?
It’s essentially a combination of some aspects of a Traditional 401K and a Roth IRA. With a Roth 401K, you can contribute the same contribution amounts as a Traditional 401K, only it is is after-tax dollars (like a Roth IRA). Your contributions and your earnings grow tax-free and are not taxed upon distributions or withdrawal in retirement.
What is the Difference Between a Roth 401K Versus a Traditional 401K?
Roths 401Ks are post-tax, traditional 401Ks are pre-tax. Roth contributions are taxed now, Traditional contributions are taxed in retirement. It’s as simple as that. Check out my complete article on Roth vs Traditional 401Ks for more details.
What is the Roth 401K Maximum Contribution in 2023?
Much like with Traditional IRA and Roth IRAs, it is a combined contribution total. The Roth 401K and Traditional 401K share the same 401K contribution maximum – $22,500 for 2022 (+ a $7,500 “catch up contribution” for those over age 50).
Are Roth 401K Matching Funds Also Post Tax?
No! This was the biggest question I had when starting a Roth 401K. I thought to myself, “hmmm… if I contribute to the Roth vs. the Traditional, then my matching funds will be higher because they are in after tax dollars”. Nice try. Your employer’s matching Roth 401K contributions are in pre-tax dollars.
This means that a Traditional 401K will be opened for you by your employer, if you didn’t already have one – and pre-tax matching funds will be placed in it. An employer CANNOT contribute after-tax matching funds to your Roth 401K. Bummer, I know.
What is the Roth 401K Catchup Contribution in 2023?
Same as the Traditional 401K. You can contribute an extra $7,500 to your Roth 401K (for a total of $30,000) if age 50 or older.
Can a Roth 401K rollover into a Roth IRA?
Yes, much like a Traditional 401K rollover into a Traditional IRA (or Roth with taxes paid), you can roll over a Roth 401K to a Roth IRA. And you should probably do this whenever you leave an employer because Roth IRA options from discount brokers.
Can you Move Money from a Roth 401K to a Traditional 401K?
No. And you’d never want to. Post-tax funds are always worth more than pre-tax funds.
Roth 401K Contributions Withdrawal Rules
You can withdraw before retirement without tax and penalty if your account is at least 5 years old. There are some exceptions, including disability that would allow you to withdraw early without penalty. And there are some funny rules around earnings to contributions, so check with a CFP on this one if you are considering it.
Roth 401K Discussion
- Does your employer offer the Roth 401K?
- Have you signed up for one?
- If you have the option of a Roth 401K and a Traditional 401K, which are you contributing the most to?