A Roth 401k is a type of retirement savings plan that represents a unique combination of Roth IRA and traditional 401k features. If your employer offers a Roth 401k or you are interested in a Solo Roth 401k, these plans allow you to contribute funds on a post-tax basis in addition to or instead of the pre-tax deferrals in a traditional 401k plan.
As seen in a Roth IRA, contributions made to your Roth 401k are after-tax, and withdrawals are made tax-free when you reach retirement. A Roth 401k is also subject to contribution limits, similar to other retirement plans.
If you are interested in investing in a Roth 401k you must either petition your employer’s 401k plan administrator to add this option to your company’s retirement fund offerings, or if you are self-employed and meet certain requirements you can open an Individual Roth 401k. It is important to research brokerage firms offering Roth 401k accounts to find the service that is right for you.
Self-employed individuals who meet the criteria for investing in an Individual Roth 401k can access the Retirement Center at online brokerage ETrade for a complete list of requirements for investing, current contributions limits, and additional regulations concerning this type of account. You can open and fund your account electronically, and begin investing right away.
Roth 401k Contribution Limits
Your combined elective deferrals presently can not exceed $16,500 if you are under 50 years old with an additional $5,500 “catch up” contribution allowed for investors over 50. This applies to the total contributions made to both your traditional and Roth 401k.
You employer is allowed to contribute matching funds to your Roth 401k, although the employer’s contributions can not receive the Roth tax treatment. These matching contributions must be allocated to a pre-tax account, just as matching contributions are on traditional, pre-tax elective contributions.
The main difference between a traditional 401k and a Roth 401k is that a traditional 401k is funded with pre-tax dollars and the Roth 401k is funded with after-tax dollars. By funding your 401k with pre-tax dollars you can receive an immediate benefit on your current year’s tax return in the form of a deduction, while contributions made after-tax are tax-free when they are withdrawn.
If you will be investing in an Individual Roth IRA your choice of brokerage firms offering Roth 401k accounts is important as high fees and commissions can negatively affect your investments the same as taxes and penalties. Online brokerage ETrade offers low commissions on trades as well as no account minimums, and a variety of investing tools.
Benefits To Investing In A Roth 401k
Roth 401ks are probably the most advantageous for younger investors who are currently in a lower tax bracket but expect to be in a higher tax bracket upon retirement. If you are currently in a higher tax bracket, it is important to consider future tax rates, as an increase to this rate would make the current tax rate appealing for a wider group of investors.
While a Roth 401k offers similar advantages to a Roth IRA, Roth 401ks are not subject to the same income limits placed on a Roth IRA. You are also afforded a larger contribution limit in a Roth 401k versus a Roth IRA – $16,500 per year for a Roth 401k if you are under 50 years old versus $5,000 per year in a Roth IRA – allowing for greater potential returns on your investments.
With an Individual Roth 401k through brokerage firms offering Roth 401k accounts, investors are also offered a broader range of investment options than typically found in a traditional 401k, with online brokerage ETrade offering over 7,000 potential investments including mutual funds, stocks and bonds and ETFs.
Always research every potential investment carefully to make sure it fits within your personal investment plan, risk-tolerance, and time frame for investing.
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