What is the Maximum Amount One Can Contribute to a Roth 401(k)?
More businesses are providing a Roth choice in their 401(k) schemes, granting employees flexibility in how they save for retirement. In contrast to a conventional 401(k) account, individuals pay income tax on their contributions to a Roth 401(k) account during the year they make them, but they won't pay taxes on qualified retirements distributions.
Individuals with access to a Roth 401(k) account need to pay heed to annual contribution limits when determining their salary deferrals.
Roth 401(k) contribution limits
For 2024, individuals can contribute the $23,000 standard contribution limit to a Roth 401(k) and an additional $7,500 catch-up limit for those 50 and older. The base contribution limit for 2025 is $23,500, but catch-up contributions remain at $7,500.
Notably, individuals between the ages of 60 and 63 qualify for an additional catch-up contribution beginning in 2025 under the Secure Act 2.0. If you're age 60 to 63, you'll be able to contribute an extra $3,750, bringing your total catch-up contribution limit to $11,250.
Importantly, these limits apply across all 401(k) accounts. Consequently, if you're splitting your contributions between a Roth account and a traditional account in the same 401(k) plan, the total still must be within the aforementioned limits.
If you participant in multiple 401(k) plans, you need to be extra vigilant regarding the limits. It's quite straightforward to exceed the 401(k) contribution limit when you have two separate plans with two different administrators who don't communicate with each other.
Note that annual employee contribution limits are distinct from employer contributions, otherwise known as the company match. The IRS has significantly higher limits for total combined contributions from employees and employers. The merged limits are $69,000 in 2024 and $70,000 in 2025. These limits do not include catch-up contributions, so it's possible for someone age 50 or older to save $76,500 in 2024, or $77,500 in 2025. Someone between the ages of 60 and 63 could save up to $81,250 in 2025.
Note that employer contributions were always tax-deferred with no Roth option for tax years 2023 and earlier. However, starting in 2024, employers can match contributions in post-tax Roth accounts. Nevertheless, many plans have not yet implemented this feature.
Roth 401(k) withdrawals
As long as the withdrawal is qualified, you won't pay any taxes.
The first step in ensuring the withdrawal is qualified is having the account for five years. Withdrawing prior to five years after establishing the account results in taxes and a penalty. At the time of the withdrawal, the account holder must be at least 59 1/2 years old. There are some exceptions if the original account holder passes away or becomes disabled.
You may be familiar with the rule of 55, which allows 401(k) account holders to access their retirement funds early if they separate from service in the year they turn 55 or later. Roth 401(k)s also make an exception for the rule of 55, but early withdrawals still come with significant drawbacks. Although account holders won't face a penalty for withdrawals before 59 1/2, they'll still have to pay taxes on the portion of the withdrawal attributable to the earnings in the account.
Like traditional 401(k)s, Roth 401(k) accounts are subject to required minimum distributions (RMDs) starting at age 73 for the 2023 tax year. However, according to the new Secure Act 2.0 rules, RMDs are no longer required for Roth 401(k)s in 2024 and subsequent tax years.
Consider Roth IRAs
If you're considering a Roth 401(k), you might also consider a Roth IRA. A Roth IRA is even more flexible than a Roth 401(k) account. The only downside is that the contribution limits are far lower. Individuals can contribute up to $7,000 in 2024 and 2025. There's an extra $1,000 catch-up contribution allowed for those 50 and older.
Besides offering more investment options, the Roth IRA can be even more advantageous than the Roth 401(k) for avoiding taxes and penalties. However, if you roll over the 401(k) account into a new Roth IRA account, the five-year period before you can withdraw funds starts over.
With a Roth IRA, you can withdraw your contributions at any point without taxes or penalty. When making an early withdrawal from a Roth 401(k), however, gains are mixed with contributions, so some of the withdrawal amount is taxable and penalized. Consequently, if you think you might need access to some of your funds before age 59 1/2, a Roth IRA may be a better choice than a Roth 401(k).
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Given the context of the text, here are two sentences that contain the words 'money', 'finance', and 'retirement':
- Deciding how much of your annual income to allocate towards retirement savings is a crucial aspect of financial planning, ensuring you have enough money to maintain your desired lifestyle in your later years.
- Retirement planning involves managing your finances effectively, including setting savings goals, investing wisely, and considering potential sources of income such as pensions and Social Security.
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