What is a Roth 401(k)?

A 401(k) is a type of employer-sponsored retirement plan. If your employer offers a 401(k), it may include many benefits including direct deposit from your paycheck, which automates the savings process, and matching funds from your employer.

There are two types of 401(k)s: traditional 401(k)s and Roth 401(k)s. The difference between them is when you will pay taxes (more on this below).

Here are the answers to ten frequently asked questions about Roth 401(k)s:

1. How is a Roth 401(k) different from a traditional 401(k)?

Contributions to a traditional 401(k) are made with pre-tax income. So you don’t pay taxes on that income initially when you make the contribution, but defer paying taxes until withdrawals are made in retirement.  

This is unlike a Roth 401(k) where contributions are made with after-tax income, so withdrawals in retirement are not taxed.

2. Can anyone open a Roth 401(k)?

No, you can only open a Roth 401(k) through your employer and not all employers offer a Roth option. Speak with your HR representative to learn about the account options available to you.

3. How do I open a Roth 401(k)?

If your employer offers a 401(k) option, speak with your HR representative to start your account. And be sure to first check out these three important questions you should ask about your 401(k).

4. What are the contribution limits to a Roth 401(k)?

The 2016 employee contribution limit to a Roth 401(k) account is $18,000 (or $24,000 if you are age 50 and older). This is the same limit as a traditional 401(k) account.

5. Which is better for me, a Roth 401(k) or a traditional 401(k)?

Whether a Roth 401(k) is a good option for you depends on if you want to pay the taxes now like with a Roth 401(k) or later like with a traditional 401(k). If you expect to earn and more as you advance in your career, and your tax rate to be higher in retirement that it is today, a Roth 401(k) may be a good option for you.

Some people also open both traditional and Roth accounts to add tax diversification to their retirement savings. Just keep in mind that the contribution limit outlined above is for all 401(k) accounts, not each account separately.

6. How much does a Roth 401(k) costs?

The costs of your 401(k) is determined by the plan options your employer has selected for you. Different fees include plan administrator fees, investment fees, and individual service fees. The U.S. Department of Labor requires that the administrator of your plan, or the company that manages the account on your employer’s behalf, disclose to you how much they are charging.

7. When can I withdraw money from my Roth 401(k)?

You can begin receiving qualified distributions (typically in the form of a monthly payment) from your Roth 401(k) at age 59 ½, or if you become permanently disabled, as long as you have been contributing for the previous five years.

Roth 401(k) plans require minimum distributions beginning at age 70 ½ or when you retire, whichever comes later. If you own a 5 percent or greater share of your employing company, then those minimum distributions must begin at age 70 ½ regardless of your employment status. Find more information about how to calculate required minimum distributions here.

8. Are there any other types of Roth accounts that aren’t 401(k)s?

Yes, Roth IRAs, or Individual Retirement Accounts, are a good option for people without a Roth 401(k) option at work, or who want more control over their investment options. Learn more about Roth IRAs here.

9. What does the word “Roth” mean?

Roth accounts are named after William Roth, a former U.S. senator. He was the chief sponsor of the Taxpayer Relief Act of 1997, which established Roth accounts.

10. I have a Roth 401(k). Now what?

Good question. Saving money, improving your financial life, building wealth, it all starts when you set a goal and make a plan to reach that goal because savers with a plan are twice as likely to save successfully. That’s where America Saves comes in. We’ll help you make a plan and a commitment to yourself to save. That’s what our America Saves Pledge is all about. Get started today by coming up with a monthly savings plan, and then pledging to save money, reduce debt, and build wealth over time. And it doesn’t stop there. America Saves will keep you motivated with information, advice, tips, and reminders to help you reach your savings goal. Think of us as your own personal support system.

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