Photo by Adeolu Eletu on Unsplash
More and more employers accept Roth contributions into their 401(k) plan. Like the more well-known Roth IRA, Roth 401(k)s allow for after-tax contributions to the plan, but Roth 401(k)s differ from their IRA counterpart in a number of ways.
Below are five advantages of the Roth 401(k).
No Income restrictions. Roth IRAs are available only to IRA savers with adjusted gross incomes below $144,000 for single tax filers and $214,000 for married couples who file joint tax returns. The Roth 401(k) has no such income restrictions. If your workplace offers a Roth 401(k), you are eligible to contribute regardless of your income.
Higher contribution limit. Roth IRAs contributions cap out at $6,000 + catch up contributions of $1,000. Roth 401(k)s have a much higher maximum contribution of $20,500 + catch up contributions just like traditional 401(k) plans. Of course, your specific plan may limit your contribution based on the plan rules that they must adhere to, but generally 401(k)s have much higher contribution limits than the Roth IRA.
Matching contributions. Roth 401(k) plans may receive matching contributions from your employer. IRAs may not. If you plan to contribute to a Roth IRA, be sure not to miss out on any matching contributions your Roth 401(k) may offer.
Stronger creditor protection. If the 401(k) is covered by ERISA (as most are) they receive all the benefits and protections offered by ERISA. As an ERISA plan, Roth 401(k)s receive strong protection against non-bankruptcy creditor lawsuits. This includes malpractice lawsuits, personal injury or other cases.
If you get sued, the Roth 401(k) would enjoy the same protections as traditional 401(k) plan assets. Solo 401(k)s are an exception to this rule as they are not ERISA covered retirement plans. Roth IRAs are covered by state law which may not necessarily be as strong as the protections offered by ERISA.
Loans. Your 401(k) may have a loan feature allowing you to borrow up to 50% of your account balance or $50,000 from your plan. Since Roth 401(k) assets are part of a traditional 401(k) plan, you may borrow against them, if your plan allows for that feature. Loans are not possible with IRAs.
Like all Roth accounts, Roth 401(k) plans are funded with after-tax dollars, but the earnings grow tax-deferred and qualified distributions are tax free. If your workplace retirement plan offers a Roth feature, talk to your financial advisor or tax professional to see if they are right for you.
To discuss any of the topics in this blog or to learn more about how we can help you Cross The Bridge To A Confident Retirement, please contact me through my web site mikebranch.net, call me directly at 651-379-3935 or email me at mpbranch@focusfinancial.com.