Posted on Dec 6, 2022
The pre-tax advantages of a 401(k) plan make it a very effective way for employees to save for retirement and lower their tax burden. Since taxes on a 401(k) are deferred until funds are actually withdrawn, the premise is that in retirement, the individual will be in a lower tax bracket than while employed. But what if the person is at an early point in their career and not making a high income, or expects to be in a higher tax bracket at retirement? In certain situations, setting up a Roth 401(k) account can be a shrewd financial move.
Roth 401(k) plans are funded with after-tax dollars, which means that the individual will pay taxes upfront to the IRS. However, contributions and accumulated earnings are not taxable when withdrawn. Investing in a Roth can be beneficial when individuals are making less money and are in a lower tax bracket to start with, or anticipate higher income tax rates upon retirement. Higher-income earners who want tax-free funds available at retirement may also consider a Roth.
The maximum contribution for a 401(k) Roth account in 2023 is $22,500, and an additional catch-up contribution of $7,500 is allowed if you’re age 50 or older. Although this contribution limit is the same as for a traditional 401(k) plan, a Roth account is designated as a post-tax account within your plan.
Watch this brief video to learn more about the pros and cons of Roth 401(k) accounts and whether investing in one is right for you.
This material is provided for informational purposes only, and is not intended as authoritative guidance, legal advice, or assurance of compliance with state and federal regulations.
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