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Anyone with access to a Roth 401(k) account can contribute, regardless of their income. But there’s more to consider before deciding whether a Roth 401(k) is right for you.
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Whether you’re a new or a seasoned investor, tax-advantaged retirement accounts are a no-brainer. But not every account fits every individual’s goals and circumstances.
Roth 401(k)s don’t have any income limits, so you can enroll if your employer offers these plans, regardless of how much you earn. They’re great if you expect you’ll be in a higher tax bracket when you withdraw from the account since you’ve already paid income taxes on the contributions.
But both Roth and traditional 401(k)s have contribution limits, and your contributions might impact your ability to use IRA tax deductions.
Learn more about Roth 401(k) income limits and guidelines below to see how a Roth 401(k) might fit into your investment strategy.
Roth 401(k) accounts don’t have an income limit. You can enroll with a $30,000 or $3 million salary as long as your employer-provided 401(k) plan offers Roth accounts (and 90% do).
However, Roth IRA accounts do have income limits, which can cause confusion. You can’t contribute to a Roth IRA if you exceed these 2024 modified-adjusted gross income (MAGI) limits:
Most people don’t earn enough to worry about 401(k) compensation limits, but it’s worth knowing if you’re a high earner considering tax liability.
Traditional 401(k)s don’t have an income limit for enrollment, meaning anyone can contribute if their employer offers one. However, if your employer offers a matching contribution, they cannot apply their formula to compensation over $345,000 in 2024.
So while you can still contribute to a 401(k) with a $500,000 salary, you’ll only earn employer-match contributions based on a percentage of that first $345,000.
Contribution limits exist across tax-advantaged retirement accounts, and both Roth and traditional 401(k)s have a $23,000 contribution limit in 2024.
People 50 and older can also save a $7,500 catch-up contribution for a total 401(k) contribution of $30,500.
It’s important to note that employer-match contributions don’t count toward your contribution limit. Say you personally contribute $23,000 a year and your employer offers a full match on contributions, up to 5% of your salary. If you make $80,000 a year, that makes your total annual contribution $27,000.
Until this year, matching contributions were made on a pre-tax basis. But a new federal law enables employers to add matching dollars to Roth accounts.
Contribution limits adjust each year, so confirm future or past limits with the IRS.
Deciding whether you want to pay more taxes now or in retirement is the best way to determine if a traditional or Roth account is right for you.
Roth 401(k)s use after-tax contributions, so you pay income taxes before adding the money to the account and don’t owe any more taxes on the contribution, growth, or future withdrawals.
If you’re investing early and expect your salary to increase over time and place you in a larger tax bracket in the future, paying taxes on Roth contributions now, while they’re cheaper, makes sense.
Your estate is another factor you might consider. The SECURE Act 2.0 removed required minimum distributions (RMDs) for Roth accounts as of 2024, meaning you don’t have to withdraw money from your Roth account at any point in retirement (assuming you begin withdrawals after 2024).
Instead, you can keep the money growing and pass any remaining tax-free funds to your heirs. On the other hand, traditional 401(k)s require RMDs at age 73, so you have to withdraw a certain amount each year, or you’re subject to certain penalties and fees.
Some employer retirement plans allow you to split your contributions between traditional and Roth 401(k) accounts. However, your total contribution limit remains $23,000 across accounts – this isn’t a sneaky way to double your annual 401(k) contributions.
Contributing to both accounts allows you to reduce your current taxable income with traditional contributions while making the most of tax-free Roth distributions in retirement.
This might make sense if you’re midcareer with a decent salary, but you still have decades to grow your income and contributions. This way, you can make traditional contributions to potentially squeeze into a lower tax bracket while also building tax-free funds via Roth contributions.
If your employer plan offers Roth treatment, chat with a financial advisor or use a compound interest calculator to weigh the pros and cons of split tax advantages vs. compound growth for each choice.
Roth 401(k) and Roth IRA accounts have very different regulations, so it’s important to know which accounts you have and how they might affect each other.
A Roth 401(k) is an employer-sponsored plan, so you’re only eligible if your employer offers this benefit. This also means your investment options will be limited to those offered by your employer’s plan provider.
Compared to a Roth IRA, these plans have higher contribution limits, better perks like employer-match benefits, and no income limit.
A Roth IRA is an individual retirement account that you can open at a brokerage regardless of your employment. While this means you’ll have more flexibility and control over your investments compared to a Roth 401(k), you also won’t have access to employer-matching benefits.
This is a great option if you’re early in your career and in a lower tax bracket that you expect to be higher by retirement age. However, Roth IRA income limits can affect your eligibility for contributions and tax deductions.
Roth 401(k)s don’t have income limits – anyone with an employer-sponsored plan can enroll in a Roth 401(k) feature, regardless of salary. But they’re not the best fit for high earners since you’re paying taxes on contributions with your current tax rate. Assuming your income and tax rate will decrease by retirement, it may be better to contribute to a traditional 401(k), which lowers your taxable income today.
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