Roth 401(k) and Roth 403(b)

Roth contributions to 401(k) and 403(b) retirement plans became available on January 1, 2006. Unlike traditional, before-tax contributions, Roth contributions come from income that has already been taxed. That means qualified withdrawals from Roth accounts, including earnings, will be free from federal and most state income taxes. Withdrawals from Roth accounts are tax-free if participants are at least 59-1/2 years old, or have died or are disabled; additionally, the Roth account must have been established at least five years before. Nonqualified withdrawals may be subject to a 10% early withdrawal penalty, and the earnings portion of nonqualified withdrawals is subject to income taxes.

Contributions limits are $17,500 or $23,000 for investors 50 and over. Limits apply to all participant contributions combined, whether traditional, Roth or both. Employer matching contributions are treated as traditional. This means that if you elect to contribute to Roth 401k portion of your 401k plan, your employer’s matching contribution will go in traditional portion of your 401k account.

Required minimum distributions (RMD) must begin at age 70–1/2 or at retirement, whichever is later. The same applies to Roth 401k and Roth 403b However, Roth accounts can be rolled into Roth IRAs, which are not subject to RMDs while the IRA owner is alive.

Not all 401(k) and 403(b) plans accept Roth contributions. If your employer’s plan has Roth 401(k) or Roth 403(b)-your choices whether you will make contributions to traditional, Roth or both accounts will depend on many factors that include but are not limited to your earnings, tax bracket, your other retirement accounts and total accumulated tax differed and/or tax-free retirement assets, your overall finances, etc. Also, have in mind that most employer sponsored retirement plans offer limited investment choices that may or may not be aligned with your needs.

401(k) and 403(b) shouldn’t be treated as all-purpose saving accounts. You must have cash reserves as well as other type of savings and investments accounts to properly allocate and manger your financial resources. Also, your investment choices must be aligned with your age, time horizon, risk tolerance, objectives and the state of all financial affairs. This is particularly important if you are only few years away from retirement. Retirement assets usually need to be repositioned as you prepare to transition from accumulation phase to distribution phase of your retirement funds. Your primary objective should be the protection of your accumulated retirement assets and your retirement income.

If you need assistance with your 401(k) or 403(b) optimization, I will be happy to help you. Please feel free to contact me.