If you have been offered the option to pick between pre-tax 401(k) and Roth 401(k), you might be wondering if there are Roth 401(k) income limits for making contributions. The good news is that there are no Roth 401(k) income limits to making contributions. Your eligibility to make contributions to a Roth 401(k) depends on whether your employer offers the plan and your qualification to the plan through your employer. If your employer offers a Roth 401(k) and you qualify, you can contribute up the the IRS limits for the year.
For 2024, the contribution limits to a Roth 401(k) are $23,000 or $30,500 if you are 50 or older. For 2023, the maximum contributions to a Roth 401(k) are $22,500 or $30,000 if you are 50 or older. These limits are similar to pre-tax 401(k) limits.
Here is everything you need to know about income limits for a Roth 401(k) plan.
What is a Roth 401(k) plan?
The Roth 401(k) is an employer-sponsored plan that allows you to make after-tax contributions through payroll deductions. Your employer may also contribute to the account. However, all employer contributions to a Roth 401(k) are considered before tax, and therefore, you pay applicable tax to employer contributions and accrued earnings during retirement.
Just like Roth IRA, qualified distributions from your contributions and their earnings are tax-free. Similarly to the pre-tax 401(k) plan, the contribution limits to Roth 401(k) in 2024 are $23,000 or $30,500 if you are 50 or older. The plan also requires RMD when you turn 73. But, you can avoid RMD by rolling over your funds into a Roth IRA.
Roth 401(k) income limits
One of the benefits of Roth 401(k) is that there are no Roth 401(k) income limits to participate in the plan. Unlike your Roth IRA where eligibility to make contributions is based on your modified adjusted gross income(MAGI) and filing status, there are no Roth 401(k) income limits for participation.
If your company offers the Roth 401(k) plan and you meet your employer’s qualifications, you can make contributions up to the IRS limits. Your Roth 401(k) contributions will come from after-tax wages through payroll deductions. Since your contributions are taxed already, you will grow the account tax-free and pay no taxes on qualified distributions.
Roth 401(k) contribution limits in 2024
Both pre-tax 401(k) and Roth 401(k) plans have the same contribution limits in 2024. If you are planning to contribute to your 401(k), the following are the contribution limits to Roth 401(k) and pre-tax 401(k) in 2024.
If you are:
- Under 50: You can contribute up to $23,000.
- 50 or older: You get an extra $7,500 catch-up contributions. That is you can contribute up to $30,500 to your Roth 401(k) plan in 2024. The pre-tax 401(k) has the same contribution limits in 2024.
These limits do not include the employer match. The total contribution to your Roth 401(k) including employer match should not exceed $69,000 in 2024 up from $66,000 in 2023. If you are 50 or older, you get an extra catch-up contribution of $7,500 for a total contribution of $76,500 in 2024 and $73,500 in 2023.
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When should you start saving for retirement?
The simplest answer is to start right now to take advantage of retirement saving tax benefits. Here are two reasons why starting today is the best time to start saving for retirement.
1. Tax advantages
Tax benefits are the biggest benefits for retirement savings. Since there are no Roth 401(k) income limits, it is better to contribute as much as you can according to the IRS limits.
The government encourages you to save for your retirement by giving you tax benefits. Depending on the retirement account you have, you could put money away before you pay taxes, invest money, and pay taxes later. Accounts that follow this model are pre-tax 401(k), 403(b), SIMPLE 401(k), SIMPLE IRA, and many more.
Or you can pay tax now, grow your account through investments, and never have to pay taxes on qualified distributions. The accounts that follow this model include Roth IRA, Roth 401(k), and many more.
Unlike brokerage accounts where you pay taxes on your earnings every year, retirement accounts allow you to either grow your account on a:
- Tax-deferred basis: This means you delay paying taxes on your contributions and associated earnings until you are taking distributions, or
- Tax-free: This means you do not pay taxes on qualified withdrawals during retirement.
By starting early, you get to start growing your account early and taking advantage of these tax benefits.
2. Take advantage of compound interest
Compound interest is the biggest wealth-building secret that anyone can take advantage of. What compound interest means in simple terms is that you earn interest on interest. That is every dollar you make gets reinvested which earns you more money and grows your portfolio faster.
From the graph above, you can see that your savings start going higher at a slow pace. But, after accumulating a lot of earnings, the account starts growing exponentially around year 10.
For compound interest to work, you must stay in the market for as long as possible. It takes a while to earn enough interest to a level where your account starts growing exponentially. Since your retirement accounts allow you to delay taxes on your earnings, all your earnings plus unpaid taxes get reinvested which helps you take full advantage of compounding interest and grow your retirement savings faster.
For this reason, you should start saving for retirement as soon as you can earn an income. Even if your job does not come with retirement benefits, opening an individual retirement account(IRA) will be a great way to get started.
Pre-tax 401(k) vs. Roth 401(k): Which one is better?
It is easy and safer to say that pre-tax 401(k) and Roth 401(k) are good retirement accounts. However, when it comes to choosing which one is better for you, the answer to this question depends on your financial situation and retirement goals.
When deciding between pre-tax 401(k) and Roth 401(k), tax benefits and when those taxes are offered are the main deciding factors.
- If you currently have a low income and are expecting a higher retirement income, a Roth 401(k) will be the best choice. This is because all qualified distributions from your Roth 401(k) contributions and associated earnings will not be taxed. Hence, reducing your tax liability during retirement.
- On the other hand, if you have a high income and are expecting a lower retirement income, the pre-tax 401(k) will be a great choice. This is because the pre-tax 401(k) allows you to lower your current tax liability from high income and possibly put you in a lower tax bracket.
Since you will have a lower income during retirement, your taxes will not be a big burden even if you will pay income tax on your 401(k) distributions.
When is your pre-tax 401(k) good for you?
The following are reasons a pre-tax 401(k) may be a better option for you compared to a Roth 401(k).
1. You are in a higher tax bracket and are expecting lower retirement income
Since contributions to pre-tax 401(k) come from before-tax wages, any dollar you stash away directly reduces your taxable income. This strategy works best for those who have high incomes and want to lower their current tax liabilities. Most people earn less money during retirement than during their active years. So, this lowers their tax obligations even if they pay taxes on their 401(k) distributions.
2. Your employer does not have a Roth 401(k) plan
Not every employer offers Roth 401(k) plans. If yours does not offer this plan, making contributions to a 401(k) would make a lot more sense before moving your money into individual retirement accounts (IRA).
In addition, your contribution limits to 401(k) will be higher ($23,000 or $30,500 if you are 50 or older) than IRA limits ($7,000 or $8,000) which gives you more tax benefits.
By contributing to your 401(k) at least to the employer match, you get to grab every free dollar offered by your employer.
Related: What does it mean to be vested in my 401(k)?
When is Roth 401(k) good for you?
The following are some of the reasons the Roth 401(k) would be a good choice over the pre-tax 401(k).
1. You have a low income and expect to have a higher income during retirement
If your current income is low and are expecting a higher income during retirement, it would be wise to put more money into your Roth 401(k) than your pre-tax 401(k). This is because every dollar added to the Roth account and earnings from it will not be taxed during retirement. Since you expect to have a higher income during retirement, your tax liability will only apply to your actual income. Qualified distributions from your Roth 401(k) will not be taxed. Hence reducing your tax burden.
2. You want tax-free withdrawals
If your tax bracket is not a big deal but still want to pay no taxes on your distributions, then choose the Roth 401(k) plan. Your contributions and earnings from them will not be taxed when you take the money out assuming you are taking qualified distributions.
3. You want to get away with the RMDs rule
By default, you are required to start taking RMDs from your Roth 401(k) account when you turn 73. But, if you don’t want to take RMDs, you can roll over the money into a Roth IRA. Hence, giving you an advantage over the 401(k) account.
4. You want to transfer wealth tax-free
Since you paid taxes on your contributions already, your beneficiaries of the account will not pay taxes on the inherited balances. The balance can be rolled over to a Roth IRA. However, just like other Roth IRA accounts, beneficiaries must start taking RMDs once the original account owner dies.
5. You want to make higher after-tax-contributions
The Roth 401(k) comes with higher contribution limits compared to a Roth IRA. So, if you are interested in making higher after-tax contributions, the Roth 401(k) will be a good choice. Instead of having a pre-tax 401(k) and a Roth IRA, you can have a Roth 401(k) and a traditional IRA.
This is because you can contribute up to $23,000 or $30,500 if you are 50 or older to your Roth 401(k) in 2024. These limits are higher compared to your Roth IRA where you can contribute only $7,000 or $8,000 if you are 50 or older for the same year.
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