Understanding Roth & After-Tax 401(k) Contributions
What Is a Roth 401(k)?
A Roth 401(k) retirement plan is an important benefit that can help your company attract and maintain top talent. With these plans, workers can make contributions to their employer-sponsored 401(k)s on an after-tax basis. This means the government takes tax out of their payments before they’re put into their account.
So, why do employees like Roth 401(k) plans? It’s because their future withdrawals, including earnings from interest, dividends and capital gains, are tax free. Once they turn 59½, these contributions become qualified distributions. So they can take money from their account without paying taxes on it.
If you match your employees’ contributions into a Roth, you’ll want to make sure they know the government will tax this portion when it’s withdrawn. You’ll also want to mention that their withdrawals won’t impact their Social Security benefits. Roth plans are subject to contribution limits, and, in 2020, the maximum is $19,500.2
What Is the Difference Between a Traditional 401(k) and Roth 401(k)?
Both you and your employees can make pre-tax 401(k) contributions to a traditional 401(k) account. This means your workers will pay taxes at a later date.
To better see comparisons between a traditional 401(k) and a Roth 401(k), take a look at this chart: