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Guided Plans. Trusted Pros. Free Tools. What Is a Roth k? We filter out sleazy advisors. See up to five investing pros we trust. About the author Ramsey Solutions. More Articles From Ramsey Solutions. Contributions are made with after-tax dollars that means you pay taxes on that money now. The money you put in and its growth are not taxed. However, your employer match is subject to taxes. There's an overall cap on your combined pretax and Roth k contributions.
You can split your contribution between Roth and pretax contributions any way you wish. It's up to you. It's up to you to make sure you don't exceed these limits if you contribute to plans of more than one employer. Your participation in a k plan has no impact on your ability to contribute to an IRA Roth or traditional.
Similarly, your ability to make deductible contributions to a traditional IRA may be limited if your MAGI exceeds certain levels and you or your spouse participate in a k plan. Because your Roth k contributions are made on an after-tax basis, they're always free from federal income tax when distributed from the plan. But the investment earnings on your Roth contributions are tax free only if you meet the requirements for a "qualified distribution.
In general, a distribution from your Roth k account is qualified only if it satisfies both of the following requirements:. The five-year waiting period for qualified distributions starts on January 1 of the year you make your first Roth contribution to the k plan. For example, if you make your first Roth contribution to your employer's k plan in December , your five-year waiting period begins January 1, , and ends on December 31, If you participate in more than one Roth k plan, your five-year waiting period is generally determined separately for each employer's plan.
But if you change employers and directly rollover your Roth k account from your prior employer's plan to your new employer's Roth k plan assuming the new plan accepts rollovers , the five-year waiting period for your new plan starts instead with the year you made your first contribution to the earlier plan.
You can generally avoid taxation by rolling all or part of your distribution over into a Roth IRA or into another employer's Roth k or b plan, if that plan accepts Roth rollovers. State income tax treatment of Roth k contributions may differ from the federal rules.
If you contribute to both a Roth k and a Roth IRA, a separate five-year waiting period applies to each. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. Partner Links. Related Terms Retirement Contribution Definition A retirement contribution is a payment into a retirement plan, either pretax or after tax.
What Is a Roth k? A Roth k is an employer-sponsored retirement savings account that is funded with post-tax money.
Withdrawals in retirement are tax free. Qualified Distribution A qualified distribution is a withdrawal that is made from an eligible retirement account and is tax- and penalty-free. What is a k Plan? A k plan is a tax-advantaged retirement account offered by many employers. There are two basic types—traditional and Roth. Investopedia is part of the Dotdash publishing family.
Later when you withdraw money from your account at retirement, any withdrawals are taxed as income. Whether the traditional k or the Roth k is better is a long debate. But many experts favor the Roth k , because of its enviable ability to withdraw money in retirement tax-free. A key difference with the traditional k is the tax benefit. In this situation you can avoid high tax rates later when you withdraw money while paying lower rates today on money that goes into the account. In contrast, if you think rates will be lower in the future — for example, if you expect your retirement income will be less than your current income — then it may make sense for you to use a traditional k.
A Roth k may also be better when you already have some money in a traditional k. You can contribute to a k and a Roth k over the course of a year, but at any point in time your account must be set to one type or the other.
For example, if you want to contribute to a Roth k in the first half of the year and to a traditional k in the second half of the year, you can adjust your account to categorize contributions as one or the other. The k administrator tracks which money went into which account type, maintaining the tax records that are vital for later at retirement age. The Roth k offers great benefits for workers looking to put away money for their retirement, not least of which is the ability to withdraw money tax-free.
How We Make Money. James Royal. Written by. Bankrate senior reporter James F. Royal, Ph. Edited By Brian Beers. Edited by. Brian Beers. Brian Beers is the senior wealth editor at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Reviewed By Robert R.
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