Last Updated on January 30, 2020
Your Roth 401(k) questions are important, which is why we’ve created a post to highlight our most frequently asked questions regarding the Roth 401(k).
Before we get started, let’s define the Roth 401(k) in a nutshell.
The Roth 401(k) is an investment savings account that you fund with after-tax dollars. Although you do not receive an upfront tax break, it is advantageous for retirement investors who believe they will be in a higher tax bracket when they reach retirement age. At IRA Financial Group, our Solo 401(k) plan allows participants to treat “elective deferral contributions” under the plan as a designated Roth contribution.
Roth 401(k) Contribution Rules
Q: Are the contribution rules for a Roth 401(k) the same as a Roth IRA?
A: The Roth sub-account of the Solo 401(k) Plan is a bit of a hybrid. Although it is technically a type of 401(k) plan, it has some of the features of a Roth IRA. Only after-tax salary deferral contributions may be deposited in the Roth 401(k) sub-account. No employer contributions and no pretax employee contributions are permitted. Therefore the entire account will contain only after-tax contributions from your salary plus pretax earnings on those contributions. Because the Roth 401(k) is actually just part of a regular 401(k) plan, most of the rules that apply to a regular 401(k) plan also apply to a Roth 401(k) plan, including the contribution limits.
Q: Can a Roth 401(k) Plan exist on its own?
A: No. A Roth 401(k) Plan is simply an option that can be added to a traditional 401(k) Plan. A Roth 401(k) Plan cannot exist on its own.
When to Tax Distributions
Q: When are Roth 401(k) distributions taxable?
A: Generally, distributions from a designated Roth account are excluded from gross income if they are:
- Made after the employee attains age 59 1/2
- “Attributable to” the employee being “disabled”
- Made to the employee’s beneficiary or estate after the employee’s death.
However, the exclusion is denied if the distribution occurs within five years after the employee’s first designated Roth contribution to the account from which the distribution is received or if the account contains a rollover from another designated Roth account, to the other account. Other distributions from a designated Roth account are excluded from gross income under Internal Revenue Code 72 only to the extent they consist of designated Roth contributions and are taxable to the extent they consist of trust earnings credited to the account.
401(k) to Roth 401(k) Conversion
Q: Can I convert a 401(k) Plan to a Roth 401(k) Plan?
A: Yes. The Small Business Jobs Act of 2010, signed by President Obama contained a little-known provision, which went to affect on Sept. 27, 2010, allowing for the conversion of a traditional 401(k) or 403(b) account to a Roth in the same plan if their employer offers one. However, the 401(k) Plan participant (employee) must pay income tax on the amount converted. Once the funds have been converted to the Roth 401(k) plan sub-account, as long as the plan participant is above the age of 59/1/2 and the Roth 401(k) account has been opened at least 5 years, all income and gains from the Roth 401(k) plan investment would be tax-free.
How to Tax Distributions
Q: How are distributions from Roth 401(k) Plans taxed?
A: All distributions from Roth 401(k) plans are either qualified distributions or non-qualified distributions. If the distribution is a qualified distribution, the early distribution tax does not apply. The early distribution tax applies only to those distributions that are subject to income tax. Because all qualified distributions from Roth 401(k) Plans are tax free, they are also exempt from the early distribution tax.
A “ qualified distribution” from a Roth IRA is excluded from gross income. To be qualified, a distribution must satisfy both of the following requirements:
- It must not occur before the fifth taxable year following the year for which a Roth IRA contribution was first made by the taxpayer or the taxpayer’s spouse.
- It must be made after the account owner reaches age 59 1/2 or becomes disabled, be made to the owner’s beneficiary or estate after the owner’s death, or be a “qualified special purpose distribution.”
Roth 401(k) to Roth IRA Conversion
Q: Can I rollover the Roth 401(k) Plan to a Roth IRA?
A: Yes. You are permitted to toll over your Roth 401(k) plan assets into a Roth IRA. If you elect to do this, the assets can be transferred in a trustee-to-trustee transfer (also known as a direct rollover) to avoid mandatory income tax withholdings on the earnings.
Roth IRA to Roth 401(k) Rollover
Q: Can I rollover a Roth IRA to a Roth 401(k) Plan?
A: No. Although you are permitted to roll over the assets of a Roth 401(k) plan to a Roth IRA, you may not do the reverse.
Required Minimum Distribution (RMD)
Q: Am I required to take Distributions from my Roth 401(k) during my lifetime?
A: The required distribution rules that force you to begin taking money out of your retirement plans and Traditional IRAs during your lifetime also apply to Roth 401(k) Plans. The required distribution rules also force your beneficiaries to take distributions from the account after your death.
Get in Touch
If you have questions about the Roth 401(k) that were not answered in this article, contact IRA Financial Group directly at 800-472-0646. You can also speak with a tax expert through our online form. We look forward to helping you.