What’s the deal with a Roth 401k?

by Chris Butterworth on November 29, 2010

I know, it sort of looks like a typo.  But Roth 401k’s do exist and they’re growing in popularity.  The Roth 401k was created by Congress in 2006 and essentially it is similar to the Roth IRA.  The plan is similar to a traditional 401k but instead of putting in money pre-tax, you contribute after-tax dollars.  Then when you withdraw your funds, you don’t pay taxes on the distributions, which is a key function of Roth accounts.

The fundamental difference between the Roth 401k and the Roth IRA is that Roth 401ks are employer sponsored whereas Roth IRA’s are self directed.  In addition, the contribution limits are different (Roth 401k’s contributions are treated similarly to traditional 401k contributions).  These plans are not widely offered but are becoming increasingly popular among employers and plan sponsors.

If your employer offers a Traditional 401k and the Roth 401k feature, you can choose how your contributions are distributed between both accounts.  The 401k contribution limits still apply to the total of your 401k and Roth 401k contributions, which are $17,000 in 2012 for those under 50 and $22,500 for those 50 and up.  So hypothetically, you could contribute $8,500 to your Roth 401(k) and $8,500 to your Traditional 401(k).

*401k, 403b, and 457 plans are functionally interchangeable.

Source: IRS Retirement Plan FAQ.

 

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