Kent Patrick, Valdosta Today Finance Contributor
Some employers offer 401(k) plan participants the opportunity to make Roth 401(k) contributions. If you’re lucky enough to work for an employer who offers this option, Roth contributions could play an important role in helping enhance your retirement income.
What is a Roth 401(k)?
A Roth 401(k) is simply a traditional 401(k) plan that accepts Roth 401(k) contributions. Roth 401(k) contributions are made on an after-tax basis, just like Roth IRA contributions. This means there’s no up-front tax benefit, but if certain conditions are met, your Roth 401(k) contributions and all accumulated investment earnings on those contributions are free from federal income tax when distributed from the plan. (403(b) and 457(b) plans can also allow Roth contributions.)
Who can contribute?
Unlike Roth IRAs, where individuals who earn more than a certain dollar amount aren’t allowed to contribute, you can make Roth contributions, regardless of your salary level, as soon as you’re eligible to participate in the plan. And while a 401(k) plan can require employees to wait up to one year before they become eligible to contribute, many plans allow you to contribute beginning with your first paycheck.
How much can I contribute?
There’s an overall cap on your combined pretax and Roth 401(k) contributions. You can contribute up to $18,000 of your pay ($24,000 if you’re age 50 or older) to a 401(k) plan in 2015. You can split your contribution any way you wish. For example, you can make $10,000 of Roth contributions and $8,000 of pretax 401(k) contributions. It’s up to you.
But keep in mind that if you also contribute to another employer’s 401(k), 403(b), SIMPLE, or SAR-SEP plan, your total contributions to all of these plans–both pretax and Roth–can’t exceed $18,000 ($24,000 if you’re age 50 or older). It’s up to you to make sure you don’t exceed these limits if you contribute to plans of more than one employer.
Can I also contribute to a Roth IRA?
Yes. Your participation in a Roth 401(k) plan has no impact on your ability to contribute to a Roth IRA. You can contribute to both if you wish (assuming you meet the Roth IRA income limits). You can contribute up to $5,500 to a Roth IRA in 2015, $6,500 if you’re age 50 or older (or, if less, 100% of your taxable compensation).
Kent Patrick is one of our team’s three advisors. He serves on the firm’s investment management committee to create and manage portfolios as well as meet with and educate clients. Kent’s other responsibilities at the firm include preparing financial plans, investment/risk analysis, and keeping the firm up to date with new technology and processes. You can submit questions about this article to kent.patrick@lpl.com
Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC. The opinion voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
