Because retirees have already paid federal income tax on the contributions they make to Roth accounts—either a 401(k) or an IRA—distributions from those accounts are tax-free. That means you won’t pay federal income tax on all the gains you made over the years in those accounts. Distributions from traditional 401(k)s or IRAs are taxed because the contributions were made with pre-tax dollars.
Contribution Limits
Each year, the Internal Revenue Service (IRS) updates the maximum amount that can be contributed to retirement accounts, including Roth IRAs and Roth 401(k)s. You can contribute a good deal more to a Roth 401(k) versus a Roth IRA.
Roth IRA
For the 2022 tax year, your total annual contributions to all of your Roth and traditional IRAs cannot exceed $6,000 or your taxable compensation for the year if it was less than the annual limit. If you’re 50 or older, you can add an additional $1,000 as a catch-up contribution for a total of $7,000. For the 2023 tax year, you can contribute $6,500, and if you’re age 50 and older, you can contribute $7,500, including the catch-up contribution.
Roth 401(k)
In 2022, the contribution limit is $20,500, and people over 50 can contribute an additional $6,500 as a catch-up contribution for a total of $27,000. For 2023, you can contribute up to $22,500, and if you are 50 or older, you can add $7,500 in catch-up contributions.
Income Limitations
You can contribute to a Roth 401(k), no matter how much money you make. However, your ability to contribute to a Roth IRA depends on your modified adjusted gross income (MAGI) and your tax filing status. The IRS has established income ranges, which determine how much you can contribute to a Roth IRA. If your income is below the low end of the range, you can contribute the maximum amount allowed. However, as your income increases within the range, the amount you can contribute is reduced—a process the IRS calls “phasing out.” If your income exceeds the high end of the income range, you can’t contribute at all, meaning you’ve phased out of being able to contribute. The tables below contain the income limits and the phase-out ranges for both 2022 and 2023.
2022 Roth IRA Income Phase Out Range
First, subtract from your MAGI from one of the amounts: $204,000 for tax year 2022 or $218,000 for the 2023 tax year and you are married or are a qualified widow(er); $0 if you are married and filing a separate return and you lived with your spouse at any time during the year; or $129,000 for 2022 or $138,000 for 2023 for any other filing status.Then divide the resulting number by either $10,000 if you are filing a joint return, are a qualifying widow(er), or are married filing a separate return and you lived with your spouse at any time during the year, or $15,000 if you have any other filing status.Multiply that figure by the maximum contribution limit (before reduction by this adjustment and before reduction for any contributions to traditional IRAs).Subtract the resulting number from the maximum contribution limit before this reduction. This amount is your reduced contribution limit.
Distribution Rules
With a Roth IRA, you may withdraw the value of your original contributions at any time without incurring taxes. With a Roth 401(k), there are restrictions. To avoid paying a 10% tax penalty, distributions may not begin until at least five years after the year of the employee’s first contribution and must occur after the employee reaches age 59½ or has died or become disabled. There are exceptions to those restrictions: You may take a distribution for educational expenses; costs associated with purchasing, building, or rebuilding a home if you meet the definition of a first-time home buyer; medical expenses; or health insurance premiums if you are unemployed. And if you are a military reservist who has been called to active duty, you may also be permitted to take a distribution. Your particular employer plan might not allow you to take distributions for the above reasons. It might, however, let you borrow money from your Roth 401(k) account. You will have to check with your plan administrator to see what is permitted.
Other Benefits of a Roth 401(k)
Distributions from all types of Roth accounts, including Roth 401(k)s, do not count in the formulas that determine how much of your Social Security benefits are taxable or the amount of your Medicare Part B premiums. And Roth accounts may be passed along tax-free to your beneficiary or beneficiaries.
One Final Drawback of a Roth 401(k)
You may not contribute money to a Roth 401(k) for a spouse who hasn’t earned any income during the year. You are permitted to make a contribution to a traditional or Roth IRA for your non-working spouse.
Inherited Roth 401(k)
If you inherit a Roth 401(k) and want to roll the money out of the plan, transfer the money directly into an inherited Roth IRA. You’ll have to take required minimum distributions (RMDs) from the inherited Roth account, but the distributions are typically tax-free. Roth IRA owners don’t need to take RMDs during their lifetimes, but beneficiaries who inherit Roth IRAs must take RMDs.
