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Effectively Using The Roth 401(k)

The Menashe Morley Group

Effectively Using The Roth 401(k)

If you’re accumulating wealth from your own business, the Roth 401(k) should have your attention. Making contributions to a traditional Roth IRA is not available to high-income earners. In 2013, individuals with modified adjusted gross income (MAGI) of $127,000 or more or couples (filing joint tax-returns) with MAGI of $188,000 or more cannot contribute to a Roth IRA. The Roth 401(k), however, is available to anyone whose company offers it and it can potentially grow some of your assets — tax-free.


In 2013, 401(k) plan participants can contribute up to $17,500 per year, or $23,000 if you are at least 50 years old. The largest difference between a Roth 401(k) and traditional 401(k) is the tax treatment of contributions and distributions. Contributions to a traditional 401(k) are tax-deductible, while contributions to a Roth 401(k) are not. In addition, any Roth 401(k) earnings can be withdrawn tax-free at the federal and state level if taken as part of a qualified distribution. On the other hand, all traditional 401(k) withdrawals will be taxed as ordinary income and may be subject to a 10 percent additional federal tax if withdrawn before age 59 ½.


There is another less obvious benefit to the Roth 401(k). Beginning at age 70 ½, you must take out required minimum distributions annually from retirement accounts, but not from Roth IRAs. If you are at least 70 ½ and have money in a Roth 401(k), you will generally be obliged to take minimum required distributions from that account. However, you could roll those Roth 401(k) assets into a Roth IRA. A direct rollover is non-taxable and there is no minimum distribution requirement from a Roth IRA for the original account owner. Now, your Roth 401(k) funds can continue to potentially grow tax-free for your or your heirs’ use.

The Menashe Morley Group
The Menashe Morley Group

David Menashe is a Senior Vice President and Wealth Management Advisor, and Bruce Morley is a First Vice President and Wealth Management Advisor, for Merrill Lynch, Pierce, Fenner & Smith Incorporated. (858.381.8113)

Photo by Andy Templeton



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