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Roth 401k Income Limitations Thumbnail

Roth 401k Income Limitations

I figured I would add another type of regular column for you to enjoy, or to annoy you.  Your pick.  I already have those where I stand on my soapbox and also ones where I ask myself questions.  This newest version will fall under the category of Public Service Announcements.   The goal is to focus on one topic that pops up in my world on a regular basis that you may not be aware of.  For this first one, I will focus on Roth 401ks.

Because I have no patience, I figured I would share the whole point of the article first – There is no income restriction on Roth 401k contributions!  That’s it.  If you want to know some more details, well, read on.

A regular old Roth IRA has income restrictions.  Basically, if you make too much money (as determined by the federal government), you are not able to contribute to a Roth IRA.  At least directly (I won’t get into backdoor Roth conversions right now).  For Single filers, the Roth contributions start getting phased out at modified adjusted gross income levels of $122,000 and are eliminated once you pass $137,000.  For Married Filing Jointly, the numbers are $193,000 and $203,000 respectively.  

The actual contribution amounts for a traditional Roth IRA are $6,000 annually.  However, if you are age 50 or older you can contribute an additional $1,000.

Now, if your employer offers a Roth 401k option and you are above the income restrictions listed above, you are not prevented from contributing to a Roth 401k.  This is because there is no income restriction/limitation when it comes to Roth 401ks.  Just like there is no income limitation to contributing to a 401k, there is no income limitation for a Roth 401k either.

The other nice benefit of a Roth 401k is the contribution limits are the same as they are for a 401k.   These amounts are significantly higher than a normal Roth IRA.  As an employee, you may contribute $19,000 and if you are at least 50 you can do another $6,000.  Now, these contribution amounts are in aggregate.  If you are 50 don’t expect to contribute $25,000 to your 401k and another $25,000 to your Roth 401k.

The big benefit with Roth 401ks is tax-fee withdrawal, as long as you meet the normal Roth rules.  Things like holding it for five years and not withdrawing until attaining age 59 ½.

The question of whether you should contribute to a Roth 401k versus a regular 401k is more complex.   It really depends on how much you have already accumulated in tax-deferred accounts, other income sources in retirement, and income tax expectations in retirement.  This is one of those questions I help my clients make sense of.

At the end of the day, if your employer offers a Roth 401k option, it is probably worth considering whether it makes sense for you.  As always, be sure to consult with your CFP® and your CPA to make sure it is the right choice.   And definitely spend some time with your HR experts to get some additional guidance on the specifics of your plan.  

In the meantime, this concludes your Public Service Announcement and I return you to your regularly programmed life!