Roth 401k Overview
A Roth 401k is a special form of a traditional 401(k); however, there is one key difference in the tax treatment applied to both. A traditional 401k allows for the contribution of pre tax dollars into a retirement account while the Roth 401k allows employees to contribute after tax dollars to this account. The tax benefits of a Roth 401k are realized when distributions are made at retirement; as long as the rules are followed, no taxes will be withheld from the distributions that are made. This is the opposite of a traditional 401k in which taxes are paid when distributions are made at a retirement age.
Rules for Contributing to Roth 401k
Like a traditional 401k, Roth 401k is currently limited to an annual maximum contribution cap of $15,500. This cap remains for those who invest in both Roth 401k and traditional 401k. The aggregate contribution amount into both of these accounts cannot exceed $15,500 for a calendar year; this contribution cap does not include any contributions made by your employer.
If you leave your employer, a Roth 401k may be transferred into a Roth IRA rollover account, but NOT a traditional 401k account. Additionally, distributions are mandated starting at the age of 70 and a half.
Advantages of Roth 401k
The Roth 401k would be advantageous to those who are currently in lower tax brackets and expect themselves to be in higher ones when retirement comes.
Additionally, as opposed to the Roth IRA, the Roth 401k does not have maximum income limits preventing you from contributing and allows for higher contributions from those who are over the age of 50. The limit for these individuals is raised to $20,500.
DISAdvantages of Roth 401k
The one major disadvantage I see to the Roth 401k plan is the plans inability to accept employer contributions. If your employer is matching between 3% and 6%, you have a lot to lose over the long run. Remember, the most powerful quality of money is its ability to compound. Compounding an employers contributions over a 20 year timeframe could amount to a substantial amount of money, permitting the fund has the appropriate asset mix.