In 1997, the Taxpayer Relief Act established the existence of Roth IRA accounts, naming them after Delaware Senator William Roth. Then, in 2001, the Economic Growth and Tax Relief Reconciliation Act established the Roth 401(k) plan. Both are qualified retirement plans, but they have some significant differences with contribution limits.
What Are the Roth 401(k) Contribution Limits?
For 2023, you can contribute up to $22,500 to a designated Roth 401(k) account. If you are age 50 or older, you can take advantage of catch-up provisions, which are special rules for those nearing retirement age. For a Roth 401(k), the catch-up provisions allow you to contribute an extra $7,500 for a total of $30,000.
What Is a Roth 401(k)?
A Roth 401(k) is a type of employer-sponsored retirement account. The Roth 401(k) lets you take advantage of the tax benefits of a Roth IRA while saving for retirement in the same way you would use a traditional 401(k). Participants use this investment to save up post-tax dollars. Because you are taxed on the money before it goes into the Roth 401(k), you don’t pay taxes when you withdraw the money, as long as you meet the requirements.
Employers can match your contribution to a Roth 401(k), and each employer decides how much it will match. They can also make elective contributions in amounts unrelated to the employee’s salary. For 2023, the combined total of employee and employer contributions cannot exceed the lower of $66,000 or 100% of the employee’s compensation ($73,500 if you’re aged 50 or older).
Employers may offer a Roth 401(k) option in addition to other retirement plans, and most do, according to the Plan Sponsor Council of America. Workers who expect to go up a tax bracket at retirement may want to explore funding both options.
Who Is Eligible to Contribute to a Roth 401(k)?
If you are eligible to participate in your company’s retirement savings plan, you are eligible to contribute to a Roth 401(k). Unlike the Roth IRA, there are no income limits with a Roth 401(k), making this a good option for those earning high wages. Employers are not required to offer a Roth 401(k), so you may want to ask your Human Resources department if this is available to you.
Can I Have a Roth IRA Along With a Roth 401(k)?
To have both a Roth IRA and Roth 401(k), you must be within the allowable income range for a Roth IRA.
For 2023, the income phase-out for contributing to a Roth IRA starts at $138,000 for individual tax filers. Individual eligibility ends at $153,000.
For taxpayers who are married filing jointly, as well as qualifying widowers, the income phase-out for 2023 starts at $218,000 and ends at $228,000.
If you qualify to have a Roth IRA and a Roth 401(k), the total you contribute each year cannot exceed $29,000, which is $22,500 into the Roth 401(k) and $6,500 into the Roth IRA. Catch-up provisions allow those age 50 and older to contribute up to $37,500 — an additional $7,500 going into the Roth 401(k) and an additional $1,000 into the Roth IRA.
What Are the Similarities and Differences Between a Roth 401(k) and a Traditional 401(k)?
The contribution limits are the same for traditional and Roth 401(k) accounts. A designated Roth 401(k) is considered a subaccount of your traditional 401(k), one that allows you to contribute post-tax dollars. The amount you designate comes out of your pay after taxes and Social Security withholdings. You don’t get a tax break in the year you contribute. If you have access to both a Roth 401(k) and a traditional 401(k), using both can help you manage the taxes you have to pay once you retire.
The most significant advantage of a Roth 401(k) is that you don’t have to pay taxes on the contributions or the earnings on them when you withdraw them in retirement. This is the opposite of how a traditional 401(k) works, where the contributions are pre-tax, and withdrawals are taxable. Neither of these account types has income limitations to participate.
An employer sponsors a Roth 401(k) while a Roth IRA is not attached to a job. Therefore, you may only open a Roth 401(k) if your employer offers it.
Are There Additional Rules to Remember?
After you make your first contribution to your Roth 401(k), you must wait at least five years and be 59 1/2 years old before you can withdraw from it tax-free. At age 72, you must start taking at least the minimum distribution from your Roth 401(k).
Roth 401(k) contributions must be made by the last day of the calendar year to be counted for that year. However, you can contribute to a Roth IRA until April 15th of each year and have it applied to the prior year.
Roth 401(k) funds can be withdrawn if you become disabled or die. If you are eligible to have a Roth IRA account, you can deposit up to $6,500 for 2023. If you are age 50 or older, you can put away an additional $1,000 under the catch-up provisions, for a total of $7,500.
What Happens to a Roth 401(k) When You Change Jobs?
When you change jobs, you can roll all of your Roth 401(k) contributions, without limit, into a new account with the new employer. The manager of the old account must complete a direct rollover to the manager of the new account. To avoid tax penalties, make sure the check is not made out to you personally and make sure the rollover is from one Roth 401(k) to another Roth 401(k).
If you are an employer looking to offer retirement options to your team, contact Human Interest for more information on the possibilities. We’ll show you all the plans available to your company’s size and corporate structure.
Article ByThe Human Interest Team
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.