Roth 401(k) Basics

Elective deferral contributions to a traditional retirement plan are contributed on a pre-tax basis and help lower your current taxable income. Roth elective deferral contributions, however, are much like a Roth IRA in that contributions are made on an after-tax basis. Money in the Roth account and any earnings will be distributed tax-free if withdrawn after age 59½, death, disability and at the end of the five-year taxable period during which the participant’s deferral is first deposited into the Roth 401(k) account (a.k.a. the Five Year Rule). A Roth 401(k) account can be rolled over to another plan that permits Roth 401(k) contributions or to a Roth IRA. If rolled into a Roth IRA, the tax-free nature remains and the money is not subject to the minimum distribution requirement at age 72 as in the Roth 401(k).

Who Would Likely Benefit?

• People who believe taxes will be greater in the future
• Young investors who believe they will be in a higher tax bracket in the future
• Investors who do not qualify for the Roth IRA due to income limit
• Low-income investors who are tax-exempt
• Investors who use Roth 401(k) as a planning tool in conjunction with traditional 401(k) plans
• Allows participants to hedge against risk of higher future tax rates

Who Would Likely Not Benefit?

• People certain that future tax rates will decrease
• People expecting to experience a significant drop in income upon retirement
• People with high temporary income
• People needing access to their funds within the first five years of deferrals

Summary

In summary, Roth 401(k) contributions have potential to allow individuals more flexibility in saving for retirement, whereby giving investors more control over the taxable alternatives. Christensen Group recommends a cautious approach when weighing the pros and cons.

Questions? Contact a member of our Retirement Plans team.

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