Participants have the option of designating some or all of their salary deferral as a Roth contribution to their 401(k) and 403(b) plans.
- Plan sponsors must elect to include the Roth 401(k) feature in their 401(k) plan document.
- Employers must ensure their payroll systems allow for after-tax contributions.
- Unlike Roth IRAs, employees at any income level can make designated Roth 401(k) contributions.
- Roth contributions are made on an after-tax basis.
- Combined traditional (pre-tax) and Roth 401(k) (post-tax) contributions cannot exceed the maximum deferral limit ($20,500 for 2022 or $27,000 for those age 50 or older).
- Roth contributions will be subject to 401(k) discrimination testing.
- Employer contributions, such as matching and profit sharing contributions, will continue to be pre-tax and subject to taxation when distributed.
- Qualified distributions from a designated Roth account are completely non-taxable to the participant if:
- The participant incurs a qualifying event (attainment of age 59½, death, or disability) and
- At least five years have passed from the date of the first Roth contribution
- Roth contributions will be eligible for rollover into a Roth IRA at retirement or separation of service.
- Roth 401(k) contributions are subject to mandatory distributions (at the later of age 72 or, for non-owners, termination of service). If rolled to a Roth IRA, mandatory distributions are not required.
WHO BENEFITS FROM DESIGNATED ROTH CONTRIBUTIONS?
- Investors who are not able to make Roth IRA contributions due to the adjusted gross income (AGI) limits ($144,000 for single filers and $214,000 for joint filers for 2022).
- Younger workers who expect to retire in a higher tax bracket.
- Investors who want to provide a tax-free inheritance to their heirs.
Stifel does not provide tax advice. You should consult with your professional tax advisor regarding your particular situation.