More employers are offering the Roth 401k retirement plan option. Although they aren't as widely recognized as their classic 401k counterparts (funded with pre-tax dollars), they're definitely worth consideration as part of your retirement savings goals.
The Roth 401k account offers several unique advantages. Because these accounts are funded using post-tax contributions (instead of pre-tax money, as in the case associated with traditional 401k accounts), distributions are tax-free when taken later, during retirement years. If you anticipate finding yourself in a higher IRA tax bracket after entering retirement or perhaps if you believe that general tax rates will rise before you leave the labor force, it may make sense to remove the tax weight on your retirement cost savings forward.
Additionally, because distributions from the Roth 401(k) are not taxable, they have no impact on the taxable income of the account holder. As such, they will not negatively impact how much of a retiree's Social Security benefits are taxed or impact the tax deduction for medical expenses, a deduction that some retirees use.
However, starting a Roth 401k retirement account isn't as simple as just moving the money out of your traditional 401k account. Because your funds in your classic 401k haven't yet been taxed, you'll need to complete a 401k rollover to Roth 401k and pay the taxes.
To start a 401k rollover to Roth 401k, you'll have to speak with the HR department at your company or ex-employer. Typically, you'll need to develop a set of documents which detail how much money you need to include in your 401k rollover to Roth 401k conversion and how you want these types of funds to be invested once in your new. You could be given the option to have have taxes withheld from your 401k rollover to Roth 401k so that you don't need to submit these taxes on your own.
Note that if you've already left the company or your company permits "in service" distributions, you will be better off with a 401k Rollover To Roth IRA. The Roth IRA has two advantages over a Roth 401(k):
- You will have unlimited investment choices in a self-directed Roth IRA
- A Roth IRA has no required minimum distributions as does a Roth 401(k)
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions