A Roth 401(k) retirement plan is similar to a regular 401(k) plan, but with the timing of the plan's taxation representing a significant difference. The traditional 401(k) plan requires before-tax paycheck contributions with no tax liability placed on the earnings until funds are withdrawn. The Roth 401(k) plan requires after-tax paycheck contributions, but the withdrawals are tax-free.Continue Reading
The basic difference between the Roth 401(k) and the traditional 401(k) is that Roth plan contributions are taxed during the year that they are earned, while the traditional 401(k) contributions are taxed when they are withdrawn. The amount of take-home pay remains the same for both plans because the Roth plan takes the taxes out of the deduction and then places the remainder of the amount into the 401(k) account.
The matched contributions that an employer pays into a Roth 401(k) plan are before-tax. These funds are kept in a traditional and separate 401(k) account and become fully taxable when withdrawn by the employee.
Beginning January 1, 2006, employers were able to offer their employees the Roth version of the 401(k), but the additional internal accounting procedures required for the newer plan are believed to have slowed down the overall enthusiasm for the Roth plan among employers. Larger firms appear to have demonstrated a greater acceptance for the Roth 401(k), and it is anticipated that smaller firms will follow suit. About 40 percent of employers were offering the Roth 401(k) plan in 2011, and the number increased to more than 50 percent of employers in 2013, as reported by Forbes Magazine.Learn more about Financial Planning
Employees can put money from many 401(k) pension plans or similar retirement plan into a Roth IRA when they leave their jobs. However, retirees may not put money from their social security or pensions into a Roth IRA, according to The Motley Fool.Full Answer >
As of 2015, Roth 401(k) contribution rules stipulate that deferrals to Roth 401(k) accounts are counted as gross income and subject to taxation when employees make them, reports the Internal Revenue Service. Employers must keep traditional 401(k) and Roth 401(k) contributions in separate accounts. Contributions to Roth 401(k) accounts have an annual limit.Full Answer >
Withdrawal rules for Roth individual retirement accounts, or IRAs, include holders must meet the five-year aging requirement, where investors withdraw money five years after the date of inception, and holders must be 59 ½ years old or disabled, explains Fidelity. First-time homebuyers may withdraw money early from their Roth IRAs.Full Answer >
There are three ways to convert a 401(k) to a Roth individual retirement account (IRA) and these are same trustee transfer, trustee-to-trustee transfer and 60-day rollover, notes the Internal Revenue Service website. Roth IRA contributions are similar to bank accounts as the account holder can withdraw the principal at any time tax-free and without incurring any penalties. The earnings of the contribution may also be withdrawn after 5 yearsFull Answer >