What is a Roth 401(k)?
A Roth 401(k) is a type of retirement savings plan that combines features of both a traditional 401(k) and a Roth IRA. Established by the Tax Relief Act of 2006, it allows employees to make contributions to their retirement savings account on an after-tax basis.
Key Features
- Tax Treatment: Contributions are made after taxes, meaning withdrawals in retirement, including earnings, are tax-free if certain conditions are met.
- Contribution Limits: For 2023, employees can contribute up to $22,500 annually, or $30,000 if they are age 50 or older, similar to traditional 401(k) plans.
- Employer Matching: Employers can still match contributions. However, the matching portion is deposited into a traditional 401(k) account and is taxed upon withdrawal.
Advantages
A Roth 401(k) offers tax diversification, providing tax-free withdrawals, which can be beneficial in retirement if you anticipate being in a higher tax bracket.
Considerations
It’s essential to consider your current versus future tax situation when deciding whether to contribute to a Roth 401(k). Consulting with a financial advisor can help make the best choice for your retirement strategy.