Q:

What is a Roth 401(k)?

A:

Quick Answer

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401(k) plan requires before-tax paycheck contributions with no tax liability placed on the earnings until funds are withdrawn.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.

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Full Answer

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are taxed during the year that they are earned, while the traditional 401(k) contributions are taxed when they are withdrawn.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 These funds are kept in a traditional and separate 401(k) account and become fully taxable when withdrawn by the employee.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.

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