Roth 401(k)

Roth 401(k) Overview

The Roth 401(k) feature permits eligible plan participants to make after-tax contributions. Because employees make after-tax contributions to the Roth 401(k) plan, the Roth 401(k) plan’s distribution in retirement are free from Federal tax—a key benefit.

Eligibility and Contribution Limit
Unlike a Roth Individual Retirement Account, eligible participants may make Roth 401(k) contributions regardless of their income level. The individual 401(k) limit of $16,500 (plus an additional $5,500 “catch-up” contribution, if participants are age 50 or older) applies to the total of traditional before-tax 401(k) and Roth after-tax 401(k) contributions.

Does "One Size" Fit All?
There is no “one size fits all” answer for employers and participants considering the Roth 401(k) feature, however knowledge of the rules and projections of future outcomes provides meaningful guidance for plan sponsors and participants. You may also want to consult with your financial advisor, attorney, accountant or tax-professional in helping you decide what approach is right for you. 

How Does a Traditional 401(k) Compare to a Roth 401(k)?

KEY DIFFERENCES

 

Traditional 401(k)

Roth 401(k)

Employee Contributions Before-tax After-tax
Employee Taxes Reduces current income tax. Pay taxes later, upon distribution. Pay current income tax.
Tax-free distributions in retirement.
Employee Distributions Federally taxed as income. Free from federal taxes if a qualified distribution.
Qualified Distributions (that are NOT subject to additional 10% federal tax penalty) Distributions can be made after Participant:
  • Attains age 59 1/2
  • Death
  • Becomes Disabled

Qualified Distributions can be made after Participant:

  • Attains age 59 1/2
  • Death
  • Becomes Disabled

AND after satisfaction of five-year rule: Five taxable years of participation in Roth 401(k).

Distributions (RMDs)
Some plans provide for RMDs to begin at the later of age 70 1/2 or separation from service, provided the participant is not a 5% owner		 Required. Required; however, prior to receiving required minimum distributions, the distributions may be over to a Roth IRA, which has no RMD requirement. This benefit allows the employee to forego taking distributions and leave the entire balance to his/her heirs.
Rollover Options Can be rolled over to another traditional 401(k) or to a regular IRA. Can be directly rolled over to another Roth 401(k) or to a Roth IRA. If rolled to another Roth 401(k), five-year rule counts from participant’s first Roth 401(k) contribution. If rolled to a Roth IRA, five year rule starts from date employee opened his/her first Roth IRA.
Employee Contribution Limits Total limit in 2009 is $16,500 (additional $5,500 catch-up contribution available if age 50 or older) in combined pre-tax 401(k) and after-tax Roth 401(k) contributions.
Employer Match Allowed Allowed, but employer match of Roth 401(k) contribution is treated as a pre-tax contribution.
Vesting Schedule All pre-tax deferrals are fully vested. All after-tax contributions are fully vested.
Recordkeeping Before-tax contributions must be accounted for separately within the same plan. After-tax contributions must be accounted for separately within the same plan.
Sunset Provision Not applicable. The after-tax Roth 401(k) contribution option is only available until December 31, 2010 (unless Congress extends it).

WHO IS MOST LIKELY TO PREFER THE REWARDS OF THE ROTH 401(K) OPTION?

  • Workers with high assets, who are seeking to manage their taxes in retirement can
    benefit from the Roth 401(k)’s tax-free qualified distributions.
  • Employees who have already accumulated substantial retirement savings, and are
    seeking to manage or lower their distribution levels in retirement, can opt to roll the Roth
    401(k) into a Roth IRA, which has no required minimum distributions.
  • People who won’t need extra income in retirement, but are interested in bequeathing
    their retirement savings to their heirs, may also be interested in rolling Roth 401(k)
    money into a Roth IRA.
  • Young workers with lower incomes today, who expect their income levels to rise and to
    pay taxes at higher rates in retirement, can benefit by paying taxes on contributions
    now, and later paying no federal taxes on qualified distributions in retirement.
  • Workers who are more than five years away from retirement may be interested in the Roth
    401(k), since there is a five-year rule on taking qualified distributions. Qualified distributions
    from a Roth 401(k) can only occur five years after the first Roth 401(k) contribution.

Delivering Power, Choice and Freedom

Our innovative offerings and services can provide a unique solution for your company’s retirement needs. To receive more information, please contact the Transamerica Retirement Solutions Internal Sales desk at (888) 401-5826 7:00 a.m. to 5:00 p.m. ET, Monday through Friday. To request additional information online, click here.