Roth 401(k)s have income limits that determine eligibility to make contributions. Individuals with incomes above the set limits are not allowed to contribute to a Roth 401(k). These limits ensure that the tax benefits associated with Roth 401(k)s are primarily available to those who need them most. The income limits are adjusted annually for inflation and vary based on filing status. If an individual exceeds the income limit, they may still be eligible to make traditional 401(k) contributions, but the tax benefits will be different.
Roth 401(k) Contribution Limits
Roth 401(k) plans offer tax-advantaged savings for retirement. Contributions are made after-tax, but qualified withdrawals in retirement are tax-free. Roth 401(k) plans have income limits that affect who can contribute and how much they can contribute.
Contribution Limits for 2023
- Employee Elective Deferrals: $22,500 ($30,000 for those age 50 or older)
- Employer Matching Contributions: $66,000 ($73,500 for those age 50 or older)
**including employee elective deferrals**
The total amount of contributions to a Roth 401(k) plan, including employee elective deferrals and employer matching contributions, cannot exceed the annual limit. In 2023, the annual limit for Roth 401(k) plans is $66,000 ($73,500 for those age 50 or older).
Income Limits for Roth 401(k) Contributions
There are income limits for individuals who can make Roth 401(k) contributions. The limits vary depending on your filing status. For 2023, the income limits are as follows:
| Filing Status | Phase-out Begins | Phase-out Ends |
|---|---|---|
| Single | $138,000 | $153,000 |
| Married Filing Jointly | $218,000 | $228,000 |
| Married Filing Separately (not living apart) | $0 | $10,000 |
| Head of Household | $153,000 | $204,000 |
If your income exceeds the phase-out limits, you cannot contribute to a Roth 401(k) plan. However, you may still be able to contribute to a traditional 401(k) plan.
Roth 401(k) Investment Options
Roth 401(k) plans offer a range of investment options, including:
- Target-date funds: Funds that automatically adjust their asset allocation based on your retirement date.
- Mutual funds: Funds that invest in a diversified basket of stocks, bonds, or other assets.
- Exchange-traded funds (ETFs): Similar to mutual funds but traded on the stock exchange.
- Company stock: Shares of your employer’s company.
- Stable value funds: Funds that invest in low-risk investments like bonds and cash.
| Investment Option | Risk Level | Potential Return |
|---|---|---|
| Target-date funds | Low to moderate | Moderate to high |
| Mutual funds | Varies | Varies |
| ETFs | Varies | Varies |
| Company stock | High | High |
| Stable value funds | Low | Low |
Roth 401(k) Income Limits
Roth 401(k) contributions are subject to income limits. For 2023, the limits are as follows:
Table: Roth 401(k) Income Limits for 2023
| Income Limit | Contribution Limit |
|---|---|
| $138,950 (single filers) | $22,500 |
| $213,350 (married filing jointly) | $22,500 |
If your income exceeds these limits, you may still be able to make Roth 401(k) contributions, but they will be subject to a pro-rata rule. Under this rule, the amount of your Roth 401(k) contributions that are eligible for tax-free treatment will be reduced based on your income.
Roth 401(k) Withdrawal Rules
Roth 401(k) withdrawals are generally tax-free. However, there are some rules that you should be aware of before making a withdrawal.
- Qualified distributions. Qualified distributions are withdrawals that are made after you reach age 59 ½ and have held the account for at least five years. These withdrawals are tax-free.
- Non-qualified distributions. Non-qualified distributions are withdrawals that are made before you reach age 59 ½ or before you have held the account for at least five years. These withdrawals are subject to income tax and may also be subject to a 10% early withdrawal penalty.
- Required minimum distributions. Required minimum distributions (RMDs) are withdrawals that you must take from your Roth 401(k) once you reach age 72. These withdrawals are subject to income tax.
Roth 401(k) vs. Traditional 401(k)
Roth 401(k)s and Traditional 401(k)s are retirement savings plans offered by employers. Both plans allow you to save money for retirement on a tax-advantaged basis, but there are some key differences between the two plans.
Key Differences
Here are the key differences between Roth 401(k)s and Traditional 401(k)s:
- Tax Treatment: Roth 401(k) contributions are made after-tax, while Traditional 401(k) contributions are made before-tax.
- Withdrawals: Roth 401(k) withdrawals are tax-free, while Traditional 401(k) withdrawals are taxed as ordinary income.
Eligibility
To be eligible for a Roth 401(k), you must meet certain income limits. For 2023, the Roth 401(k) income limits are as follows:
| Marital Status | Roth 401(k) Contribution Limit |
|—|—|
| Single | $22,500 |
| Married Filing Jointly | $29,000 |
| Married Filing Separately | $22,500 |
| Head of Household | $26,500 |
If you exceed the income limits, you may still be able to contribute to a Roth 401(k) using a “backdoor Roth” strategy. However, you should consult with a financial advisor to determine if this strategy is right for you.
Benefits
Roth 401(k)s can offer a number of benefits over Traditional 401(k)s, including:
- Tax-free growth: Money in a Roth 401(k) grows tax-free, which can help you accumulate more money for retirement.
- Tax-free withdrawals: Withdrawals from a Roth 401(k) are tax-free, which can help you save on taxes in retirement.
Drawbacks
Roth 401(k)s also have some drawbacks, including:
- Income limits: Roth 401(k)s have income limits, which means that you may not be eligible to contribute if you earn too much money.
- No deduction: Roth 401(k) contributions are made after-tax, which means that you do not get a tax deduction for your contributions.
Which Plan Is Right for You?
The best retirement plan for you will depend on your individual circumstances. If you are eligible for a Roth 401(k), it may be a good option if you expect to be in a higher tax bracket in retirement. However, if you are not eligible for a Roth 401(k), or if you expect to be in a lower tax bracket in retirement, then a Traditional 401(k) may be a better option.
Thanks for sticking with me through all the nitty-gritty details of Roth 401(k) income limits. I know it can be a bit of a snooze-fest, but it’s important stuff to know if you’re planning for retirement. If you have any more burning questions, don’t hesitate to drop me a line. And be sure to swing by again soon for more financial wisdom.