The Roth 401(k) is one of the best retirement accounts available on the market. Not only you will grow your account potentially tax-free and pay no tax on qualified distributions, but you may also get an employer match. Hence, growing your account much faster. The Roth 401(k) contribution limits are the same as pre-tax 401(k) but higher than the Roth IRA. The contribution limits to Roth 401(k) in 2024 are $23,000. If you are 50 and older, you get an extra $7,500 catch-up contribution.
Here is everything you need to know about contribution limits to Roth 401(k) plan.
What is a Roth 401(k)?
A Roth 401(k) plan is an employer-sponsored retirement plan where contributions come from your after-tax wages. All contributions are deducted from your paycheck through payroll deductions. This account is a hybrid between a Roth IRA and a pre-tax 401(k).
Unlike pre-tax 401(k) where you pay income tax on your distributions, qualified distributions from your Roth 401(K) are tax-free. Any contributions made by your employer and related earnings, however, will be subjected to income tax during retirement.
Just like your Roth IRA, you pay tax before making contributions. The main benefit of Roth 401(k) is that you grow your account potentially tax-free and pay no tax on qualified distributions except on employer match to the plan and earnings they generated.
Here are the maximum contributions to Roth 401(k) in 2024.
What are the contribution limits to Roth 401(k) in 2024
When it comes to making contributions, both the pre-tax 401(k) and Roth 401(k) have the same limit.
The contribution limits to Roth 401(k) in 2024 are $23,500. If you are 50 or older, you will get an extra $7,500 catch-up contribution. That is you can contribute up to $30,500 to a Roth 401(k) plan if you are 50 or older.
Since your employer may also contribute to your account, there is a limit to the total contributions. The total contributions to your account including your employer match is $69,000 or $76,500 if you are 50 or older.
Pros of Roth 401(k)
The Roth IRA is beneficial for people who want to build their retirement savings and never have to worry about taxes during retirement on their distributions. By paying taxes now, you get to enjoy tax-free growth and pay no tax on qualified distributions.
For Roth 401(k), a qualified distribution is a distribution where:
- You are at least 59½, and
- You have owned the account for at least 5 years.
The employer can also match your contributions up to a certain percentage. Hence, growing your retirement savings even faster. Unlike the pre-tax 401(k), you can rollover funds from your Roth 401(k) into a Roth IRA to avoid required minimum distributions(RMDs) when you turn 73.
In addition, there is no income limit to making contributions to Roth 401(k).
Summary of Roth 401(k) benefits.
- Qualified withdrawals are tax-free
- No income limits
- You can roll over your funds into a Roth IRA to avoid RMDs
- You can withdraw funds early without a penalty when you meet IRS special cases
Cons of Roth 401(k)
Each retirement savings comes with its drawbacks. For the Roth 401(k), the biggest downside of the plan is the fact that it does not give you upfront tax benefits. This makes it harder for many people to make large contributions using after-tax money.
In addition, the plan comes with the required minimum distributions when you turn 73. But, you can get away with RMDs by rolling over your money into a Roth IRA.
Most employer-sponsored plans including Roth 401(k) require minimum distributions when you hit 73. This is because, with these plans, you can contribute before-tax money, and/or your employer will make contributions to your account. Other accounts that require RMDs include traditional IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, SEP IRAs, and profit-sharing plans.
By law, you must pay tax on any tax-deductible contribution made to the account. By requiring RMDs, the IRS gets its cut from all before-tax contributions to your plan and related earnings.
The Roth 401(k) also comes with a 10% early withdrawal penalty. By default, most retirement plans require that you turn 59½ before withdrawing money from your retirement account. Any distribution you take from the account before this age is considered early, and therefore, may be subjected to a 10% early withdrawal penalty.
Taxes will also be assessed on early distributions that can be considered gross income if you have not owned the account for at least 5 years. The taxable portion of your distribution will include your employer match plus its earnings and earnings from your contributions.
The contribution you made to the plan can be taken out at any time free of tax since they were taxed already.
Roth 401(k) cons summary:
- There are no upfront tax benefits on your contributions
- RMDs are required once you turn 73
- A 10% penalty and tax may apply on unqualified distributions
Can I contribute to 401(k) and Roth 401(k) at the same time?
Yes. You can contribute to both 401(k) and Roth 401(k) at the same time if your employer has both options. However, the combined contribution cannot exceed the annual contribution limit to 401(k) plans allowed by the Internal Revenue Service (IRS).
The contribution limits to Roth 401(k) or 401(k) in 2024 is $23,000 or $30,500 if you are 50 or older. This limit does not include your employer match.
If you choose to contribute to both accounts, you must divide your contributions between them making sure that you do not go over the limits allowed by the IRS. For example, you can decide to put $10,000 into your Roth 401(k) and put the remaining $13,000 in a pre-tax 401(k) for 2024.
