What is the difference between regular 401(k) contributions and Roth 401(k) contributions?

When a participant defers pay to a regular 401(k) account, the amount is taken from their pay on a pre-tax basis. They won’t be taxed until they withdraw their funds.

When they defer to a Roth 401(k) account, the amount is contributed to their account on an after-tax basis, meaning that they have already paid income tax on it.

Who is eligible to make Roth 401(k) contributions?

If a participant is eligible to contribute to their 401(k) plan and their plan permits Roth 401(k) contributions, they may designate a portion of their pay as Roth contributions.

Can a participant make both regular 401(k) contributions and Roth 401(k) contributions at the same time?

Yes. The plan’s recordkeeper will maintain separate sub-accounts for these two types of contributions.

What is the contribution limit for Roth?

There is not a separate contribution limit for Roth. A participant’s regular (pre-tax) 401(k) contributions and Roth 401(k) (after-tax) contributions both count toward the $18,500 limit in 2018 ($24,500 if eligible to make a catch-up contribution).

Is there an income limitation for making Roth 401(k) contributions?

No. While a participant is not eligible to contribute to a Roth IRA if their gross income exceeds certain income limits, those income restrictions do not apply to Roth 401(k) contributions.

How do distributions from traditional and Roth 401(k) accounts differ?

Traditional 401(k) contributions are subject to taxation when you withdraw them from your account.

Roth 401(k) contributions are taxed at the time they were contributed, therefore they won’t be taxed when distributed.

In order for the earnings on Roth 401(k) contributions to be tax-free, they must be distributed only after the attainment of age 59-1/2, disability, or death. In addition, five years must have passed from the year when Roth 401(k) contributions were first made.

When does the five-year period start?

The five-year period begins on the 1st day of the year in which the participant makes their first Roth 401(k) contribution.

Contributions made in a subsequent year do not start a new five-year waiting period.

Will participants have to take required distributions of their Roth 401(k) contributions beginning at age 70-1/2?

Yes. Like regular 401(k) contributions, the participant must begin taking minimum distributions from their Roth 401(k) account at age 70-1/2. (Please note that Roth IRAs are not subject to the Required Minimum Distribution rules.)

What are the next steps to add a Roth 401(k) feature to your plan?

To add a Roth 401(k) feature to your plan, there must be a plan amendment, changes to the existing administrative forms, and to your payroll systems. Employees must be educated on their new option. New Summary Plan Descriptions must be prepared and distributed to your plan participants.

Roth 401(k) features can be advantageous for owners and participants alike. Please contact your Plan Consultant if you are interested in adding this feature.