Can I contribute to my Roth 401k regardless of my income? In this episode of Ask The Hammer, Jeffrey Levine, aka The Hammer answers the question: Can I contribute to my Roth 401k regardless of my income even though that’s not the case with a Roth IRA?
A Roth 401(k) is a type of retirement savings account that combines features of a traditional 401(k) with those of a Roth IRA. Like a traditional 401(k), contributions to a Roth 401(k) are made on a pre-tax basis, meaning that they are deducted from your paycheck before taxes are withheld, reducing your taxable income for the year. However, unlike a traditional 401(k), contributions to a Roth 401(k) are not tax-deductible.
Here are some key features of Roth 401(k) accounts:
- After-Tax Contributions: Contributions to a Roth 401(k) are made with after-tax dollars, meaning that you pay taxes on the income used to fund the account upfront. Because contributions are made with after-tax dollars, qualified distributions from a Roth 401(k) in retirement are tax-free, including both contributions and earnings.
- Employer Matching Contributions: Some employers offer matching contributions to employees’ Roth 401(k) accounts, similar to traditional 401(k) plans. Employer matching contributions are typically made on a pre-tax basis and deposited into a separate account within the Roth 401(k) plan.
- Contribution Limits: Like traditional 401(k) plans, Roth 401(k) plans are subject to annual contribution limits set by the IRS. For the tax year 2022, the combined annual contribution limit for all 401(k) contributions, including both traditional and Roth 401(k) contributions, is $20,500 for individuals under age 50 and $27,000 for individuals age 50 and older who are eligible for catch-up contributions.
- No Income Limits: Unlike Roth IRAs, which have income limits that restrict high-income earners from contributing, there are no income limits for contributing to a Roth 401(k). This makes Roth 401(k) plans an attractive option for individuals who exceed the income limits for Roth IRAs but still want to make after-tax contributions to a retirement account.
- Required Minimum Distributions (RMDs): Roth 401(k) accounts are subject to required minimum distribution (RMD) rules, similar to traditional 401(k) plans. However, unlike traditional 401(k) plans, Roth 401(k) RMDs apply only to the employer’s contributions and associated earnings, not to the individual’s after-tax contributions. Roth IRA accounts, on the other hand, are not subject to RMD rules during the account owner’s lifetime.
Roth 401(k) plans offer individuals the opportunity to save for retirement with after-tax dollars and enjoy tax-free distributions in retirement, providing tax diversification and flexibility in retirement planning. However, individuals should carefully consider their financial situation, tax considerations, and retirement goals before deciding whether to contribute to a Roth 401(k) or a traditional 401(k). Consulting with a financial advisor or tax professional can help individuals make informed decisions about retirement savings strategies.
Watch this episode of Ask The Hammer to see the answer to the question: Can I contribute to my Roth 401k regardless of my income? and catch more episodes of Ask The Hammer at this link: https://www.finstream.tv/videos/ask-the-hammer/