Roth 401(k) Component
Banner Health’s Roth 401(k) Component offers eligible employees the opportunity to set aside money in a post-tax retirement plan.
- Roth 401(k) Component
- Who Might Benefit From the Roth 401(k) Component?
- Is There Possibility of Being in a Higher Marginal Tax Rate in Retirement Than During One’s Working Years?
- What are the Maximum Income Limits for the Roth 401(k)?
- Lets you elect how much of your salary you wish to contribute (above the first 4% which must be contributed to the pre-tax component)
- Allows contributions within the IRS limits (your annual IRS limit for the 401(k) and the Roth 401(k) are combined)
- Bases your contribution on a percent of eligible salary
- Allows you to invest in the same funds offered in the pre-tax 401(k) component
- Uses post-tax dollars to make your contributions
- Allows you to withdraw your contributions (which have already been taxed) and the earnings on those dollars are tax-free when you retire if you are at least age 59 1/2 and if the first Roth 401(k) contribution was made at least 5 years before the distribution. This is called a qualified distribution.
- Younger employees who have a longer retirement horizon and more time to accumulate tax-free earnings
- Highly compensated employees who want a pool of tax-free money to draw on in retirement
- Employees who want to leave tax-free money to their heirs
This is a question that no one can answer with certainty. Marginal income tax rates have declined over the last two decades, and there have been several recent proposals in Congress to further lower income taxes. If tax rates were to continue to decline, a traditional, pre-tax 401(k) might be the better option. The same is true for employees who expect their marginal tax rate to be lower in retirement as the result of a lower income.
If tax rates stay the same, a traditional pre-tax or Roth 401(k) will likely yield the same nest egg after taxes.
If tax rates rise, paying taxes now through a Roth 401(k) component will likely yield a higher after-tax retirement benefit than the traditional, pre-tax 401(k) deferral.
If tax rates decrease, deferring taxes now in a traditional, pre-tax 401(k) component would probably benefit you more at retirement.
Unlike Roth IRAs, there are no maximum income limits for Roth 401(k) contributions. Even if your income is too high to qualify for a Roth IRA, you can make Roth 401(k) contributions.
The comparison chart shows how the two components of the 401(k) plan (the regular pre-tax 401(k) and the post-tax Roth option) work together to provide a balanced retirement income. We suggest that you check with your tax advisor before making any decision on Roth after-tax contributions.
Detailed information on this benefit such as eligibility, plan coverage, limitations and contact information can be found in the Summary Plan Description (SPD).