The Roth 401k is a unique type of retirement savings plan that been around for a number of years. Yet, many individuals don’t know what this type of account can provide for them and what its advantages are. Under a Roth 401k, instituted in 1998, individuals can voluntarily contribute post-tax earnings to an individual retirement account, but unlike traditional IRAs, a Roth 401k account allows for tax-free growth and distribution if the account is at least five years old and the account owner has reached age 59½.
Contribution limits for a Roth account are much less than those for a traditional 401k. For the 2014 tax year, account owners may contribute a maximum of $5,500 if under age 50 and $6,500 if older than 50. Additionally, contributions are limited for individuals with a modified adjusted gross income of over $112,000 or $178,000 for married taxpayers filing jointly.
Roth 401k plans allow employees to voluntarily contribute post-tax funds in addition to, or instead of pre-tax fund under traditional 401k plans. Employers can make matching contributions to Roth plans, but those matching contributions will not receive the same tax treatment. Matching contributions must go into a pre-tax account.
The biggest difference between a regular 401k account and a Roth 401k is that the money contributed to the Roth account is taxable in the year that it is earned, while earnings on a Roth account are not taxable ever. Earnings on traditional 401k accounts are taxable upon withdrawal.
Roth 401k accounts are advantageous to younger individuals currently in lower tax brackets who expect to move into higher ones when they are older. Contributions are irrevocable. Once money is invested, it cannot be moved to a traditional 401k account. The money can be rolled over into a Roth IRA account, however, when employment ceases. Owners of Roth 401k accounts must begin distributions at age 70½.