What is a Roth 401(k)?
Roth 401(k) Definition
A Roth 401(k) is an employer-sponsored investment savings account that is funded with after-tax dollars and provides a tax advantage to investors.
Investors in a Roth 401(k) enjoy tax-free growth and do not pay tax when funds are withdrawn in retirement.
Who Should Consider a Roth 401(k)?
Investors who think they will be in a higher tax bracket during their retirement years are in a position to consider a Roth 401(k), since they will be able to avoid paying the higher taxes upon withdrawal.
A traditional 401(k) is not taxed at deposit but is at withdrawal, making it the better option for those who expect to be in a lower tax bracket upon retirement.
The contribution limits to a Roth 401(k) are dependent on the age of the investor.
The limits individuals are able to contribute in 2020 are $19,500 per year, with individuals over the age of 50 having the option to contribute an extra $6,500, known as a catch-up contribution, as a means to supplement any investment funds they may be lacking as they near retirement.
In order for withdrawals on any contribution to be free of tax, criteria has to be met to qualify the distribution.
The Roth 401(k) account has to have been held for at least five years, and the withdrawal must have been taken out on account of disability, when an account holder reaches the age of 59 ½ , or after the death of an account owner.