The Facts on 401(K)s – Roth v. Traditional
December 10, 2009 | 
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The main difference between a Roth 401(k) and a Traditional 401(k) deals with the taxation of contributions and investment earnings. Key features of both plans are highlighted in the table below:
|
Feature |
Roth 401(k) |
Traditional 401(k) |
|
Contributions |
Employee contributions are made with after-tax dollars |
Employee contributions are made with pre-tax dollars |
|
Income Limits |
No income limit to participate |
No income limit to participate |
|
Maximum Elective Contributions |
Combined* contribution limit is $16,500 for 2009 and 2010 Age 50+ catch-up is $5,500 for 2009 and 2010 |
Combined* contribution limit is $16,500 for 2009 and 2010. Age 50+ catch-up is $5,500 for 2009 and 2010 |
|
Employer Matching |
Yes (see below for explanation) |
Yes |
|
Taxation of Withdrawals |
Withdrawals of contributions and investment earnings are tax-free provided that it is a qualified distribution, the participant is at least age 59 ½ and the account has been open at least 5 years |
Withdrawals of contributions and investment earnings are subject to Federal and most state income taxes |
|
Required Distributions |
Distributions must begin no later than age 70 ½ unless still working and not a 5% owner |
Distributions must begin no later than age 70 ½ unless still working and not a 5% owner |
|
Early Distribution Penalty |
A 10% penalty is assessed on distributions received before age 59 ½ unless an exception applies |
A 10% penalty is assessed on distributions received before age 59 ½ unless an exception applies |
Source: Internal Revenue Service
*Contribution limitation is by individual rather than type of plan.
FAQs
Q: Can my employer make matching contributions into my Roth 401(K)?
A: Any deferrals into a Roth 401(K) must be made into a designated Roth account. Only employee contributions are allowed to be allocated to this designated account. When an employer wants to make a matching contribution, it must be done into a pre-tax account, just as with the traditional 401(K). The employee will pay tax on the matching contributions at the time of distribution.
Q: Can I contribute into my IRA and my 401 (K) in the same year?
A: Yes. You may contribute to both types of accounts in the same year, up to the maximum allowable limits. The deductibility of your contribution to the IRA will depend upon your income level.
The maximum contribution per individual in 2010 to a 401 (K) plan (Roth and Traditional) is $16,500 with an additional $5,500 for individuals age 50 or older.
The maximum contribution per individual in 2010 to an IRA (Roth and Traditional) is $5,000 with an additional $6,000 for individuals age 50 or older.
Submitted by Paula Friedman
Questions?
paula.friedman@glassjacobsonIA.com
