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Key Benefits of the Roth 401(k) and Roth 403(b)

A Roth 401(k) or Roth 403(b) option may be appropriate for you depending on your tax bracket and individual situation. If your employer offers this feature, you may want to consider making some of your 401(k) or 403(b) contributions on a Roth, or after-tax, basis.

The primary benefit of the Roth option is that any potential earnings in the account grow free of federal (and in most cases state) income tax.  But they also offer several other potential advantages over regular 401(k) and 403(b) contributions as well as Roth IRAs:

  • Unlike a Roth IRA, after-tax contributions to a Roth 401(k) or Roth 403(b) are not subject to gross income limits
  • In order for the distributions to be tax free, the participant in the Roth account must have held the account for at least five years and experienced a qualifying event (age 59½, death or disability)
  • In 2013 and 2014, the maximum contribution for a Roth IRA is $5,500 and up to $6,500 if you have reached age 50. For a Roth 401(k) or Roth 403(b), the 2013 and 2014 limit is $17,500 and up to $23,000 if you have reached age 50 
  • Unlike the Roth IRA, Required Minimum Distributions (RMDs) apply to Roth 401(k) or Roth 403(b) accounts. However, the RMD requirement can be avoided by rolling the Roth 401(k) or Roth 403(b) assets into a Roth IRA before age 70½
  • Provides an opportunity for you to diversify contributions and potentially hedge against years where you may be subject to higher taxes

Investing in a Roth 401(k) or Roth 403(b) should be considered along with your other savings and investment strategies.

Next Steps
  • Check with your plan administrator to see if your 401(k) or 403(b) plan offers a Roth option
  • Then, speak with your financial advisor and tax advisor to determine whether Roth 401(k) or Roth 403(b) contributions make sense for you
  • Find out more about Roth and traditional IRAs

This material is provided for general and educational purposes only, and is not intended to provide legal, tax or investment advice, or for use to avoid penalties that may be imposed under U.S. federal tax laws. Contact your attorney or other advisor regarding your specific legal, investment or tax situation.

WEBC.062409.03  07.02.09

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