How Designated Roth or Roth 401(k) Plans Work

Nest eggs labeled IRA and Roth 401(k).
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Some employers offer workers the ability to invest retirement money in both a traditional 401(k) plan and a designated Roth account, which is often called a Roth 401(k). That gives employees the option of making pre-tax contributions to the traditional 401(k), after-tax contributions to the designated Roth account, or both. (Roth provisions can also be added to other types of qualified retirement plans such as a 403(b) or 457.)

Because retirees have already paid federal income tax on the contributions they make to Roth accounts—either a 401(k) or an IRA—distributions from those accounts are tax-free. That means you won't pay federal income tax on all the gains you made over the years in those accounts. Distributions from traditional 401(k)s or IRAs are taxed because the contributions were made with pre-tax dollars.

If your employer offers a 401(k) match, all of the company's contributions will go into your regular, pre-tax 401(k) account, not your Roth 401(k) account.

Contribution Limits

For 2019, your total contributions to all of your Roth and traditional IRAs can not exceed $6,000 (or $7,000 if you’re 50 or older) or your taxable compensation for the year, if it was less than the annual limit.

You can contribute a good deal more to a Roth 401(k): $19,000 if you're 49 or younger or $25,000 if you're 50 or older.

Income Limitations

You can contribute to a Roth 401(k) no matter how much money you make. Your ability to contribute to a Roth IRA depends on your modified adjusted gross income (MAGI).

If your filing status is ... ... And your MAGI is ... ... Then you can contribute
married filing jointly or qualifying widow(er) < $193,000 up to the limit
married filing jointly or qualifying widow(er) ≥  $193,000 but < $203,000 a reduced amount
married filing jointly or qualifying widow(er) ≥ $203,000 zero
married filing separately and you lived with your spouse at any time during the year < $10,000 a reduced amount
married filing separately and you lived with your spouse at any time during the year ≥ $10,000 zero
singlehead of household, or married filing separately and you did not live with your spouse at any time during the year < $122,000 up to the limit
singlehead of household, or married filing separately and you did not live with your spouse at any time during the year ≥ $122,000 but < $137,000 a reduced amount
singlehead of household, or married filing separately and you did not live with your spouse at any time during the year ≥ $137,000 zero

Source: Internal Revenue Service

To calculate the reduced amount you may contribute:

  • First subtract from your MAGI one of three amounts: 1) $193,000 if you are filing a joint return or are a qualified widow(er), 2) zero if you are married and filing a separate return and you lived with your spouse at any time during the year, or 3) $122,000 for any other filing status.
  • Then divide the resulting number by either $10,000 if you are filing a joint return, are a qualifying widow(er), or are married filing a separate return and you lived with your spouse at any time during the year or $15,000 if you have any other filing status.
  • Multiply that figure by the maximum contribution limit (before reduction by this adjustment and before reduction for any contributions to traditional IRAs).
  • Subtract the resulting number from the maximum contribution limit before this reduction. This amount is your reduced contribution limit.

Distribution Rules

With a Roth IRA, you may withdraw the value of your original contributions at any time without incurring taxes. With a Roth 401(k), there are restrictions. To avoid paying a 10 percent tax penalty, distributions may not begin until at least five years after the year of the employee’s first contribution and must occur after the employee reaches age 59½ or has died or become disabled.

There are exceptions to those restrictions: You may take a distribution for educational expenses; costs associated with purchasing, building, or rebuilding a home if you meet the definition of a first-time home buyer; medical expenses; or health insurance premiums if you are unemployed. And if you are a military reservist who has been called to active duty, you may also be permitted to take a distribution.

Your particular employer plan may not allow you to take distributions for the above reasons. It may, however, let you borrow money from your Roth 401(k) account. You will have to check with your plan administrator to see what is permitted.

Unlike with Roth IRAs, holders of Roth 401(k)s are required to begin taking out minimum distributions by April 1 of the year after they turn 70½ unless they are still working.

Other Benefits of a Roth 401(k)

Distributions from all types of Roth accounts, including Roth 401(k)s, do not count in the formulas that determine how much of your Social Security benefits are taxable or the amount of your Medicare Part B premiums. And Roth accounts may be passed along tax-free to your beneficiary or beneficiaries.

One Final Drawback of a Roth 401(k)

You may not contribute money to a Roth 401(k) for a spouse who hasn't earned any income during the year. You are permitted to make a contribution to a traditional or Roth IRA for your nonworking spouse.