Nine Questions on Investing for Retirement in a Roth 401(k)

A recent personal finance story, "The Retirement Savings Move Tax Pros Love," got an enthusiastic response from readers who are considering investing for retirement in a Roth 401(k). The story also generated many questions. We took some of those questions to retirement expert Barry Picker, a CPA and author of "Barry Picker's Guide to Retirement Distribution Planning." His answers below are guidelines and may not apply to everyone and every situation.

Q: Is there an income limit to be eligible to contribute to a Roth 401(k)?

A: There is no income limit.

Q: If my employer offers a Roth 401(k) and a traditional 401(k), will I have to choose between contributing to one or the other?

A: You can contribute to the traditional, the Roth, or both, as long as your total salary deferral does not exceed the maximum permitted.

Q: What is the maximum amount I can invest in a Roth 401(k) in 2012?

A: The maximum that can be contributed to 401(k)s in 2012 is $17,000, plus an extra $5,500 for individuals past age 50 as of the end of the year. The maximum ($17,000/$22,500) can be divided between the traditional 401(k) and Roth 401(k).

Q: Will my employer make a matching contribution to a Roth 401(k)?

A: If you contribute to a Roth 401(k), your employer can still match your contribution. However, the employer’s match will be paid into a traditional 401(k), not the Roth 401(k).

Q: Can I convert money in a traditional 401(k) into a Roth 401(k)? Is there an income limit on who can do this conversion? Will I owe tax when I convert?

A: You can convert money in a traditional 401(k) into a Roth 401(k). There is no income limit to do this conversion, but it is a taxable transaction.

Q: If I am older than 59 ½ when I start to contribute to a Roth 401(k), must I wait the five years before I can make tax-free withdrawals?

A: Yes, you have to meet both the age and years-of-participation requirements before you can take tax-free withdrawals. Note that your contributions are always available to you tax-free, as they came from your after-tax income. It is only your account earnings that can be taxed. However, in a Roth 401(k) -- unlike a Roth IRA -- any distribution is deemed to come pro-rata from your contribution and from earnings. So a withdrawal prior to meeting both requirements for a tax-free withdrawal will most likely have some taxable component.

Q: Assuming I wait until age 59 1/2 to make a withdrawal from a Roth 401(k), and my account is at least five years old, is there any circumstance where I would owe any tax on either the principal or earnings withdrawn from the account?

A: No one will ever owe tax on the principal -- it’s already been taxed. It’s only the income that would be taxed if one does not meet the requirements for tax-free withdrawals. Assuming you are over 59 1/2 and have the account is over 5 years old, there will not be a tax on the withdrawals.

Q: If I don’t roll over my Roth 401(k) to a Roth IRA and I take required minimum distributions from the Roth 401(k), will those distributions count as taxable income?

A: The only time a required minimum distribution could have taxable income is if the individual has not been a participant in the Roth 401(k) for more than five years.

Q: Does contributing the maximum to a Roth 401(k) impact whether I can also contribute to a Roth IRA?

A: No. There is an income limit on Roth IRA contributions. Assuming your income is not over the limit, the contribution to the Roth 401(k) will not impact the ability to contribute to a Roth IRA.

(Carla Fried is a freelance writer based in California.)

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