Roth 401(k)s were intended to give workers the best of both worlds. They offer the high contribution limits and employer match of a 401(k) with the tax-free withdrawals of a Roth IRA. But as a trade-off, Roth 401(k) savers have had to contend with some annoying tax rules that Roth IRA owners don't deal with.
Fortunately, the passage of the SECURE 2.0 Act at the end of 2022 has changed that. Here are the two biggest changes that should make your Roth 401(k) a lot better in years to come.
Image source: Getty Images.
1. Roth employer matches
Employers have long been able to make matching contributions to employees' Roth 401(k)s, but those matches have always been with pre-tax dollars. They had to go into a pre-tax account, like a traditional 401(k), and you have to pay taxes on the money when you withdraw it later on. That's still better than not getting a match at all, but it's not as convenient as a Roth match.
The SECURE 2.0 Act now makes it possible for employers to make matching contributions to employees' Roth 401(k)s. Unlike many provisions of the new law, this went into effect immediately upon passage of the act. But it's important to recognize that it is optional. Employers may still elect to make pre-tax matches or they may not provide a company match at all.
If you're unsure if Roth 401(k) matches are available to you, reach out to your employer for clarification. Even if it's not an option right now, it could be available to you in the future, so keep an eye out for any notifications you get about plan changes as well.
2. No more Roth 401(k) required minimum distributions
Required minimum distributions (RMDs) are mandatory annual withdrawals that all workers must take from their retirement accounts beginning in the year they turn 73. The government does this because it wants to get its share of your retirement savings while you're still alive (via taxes on these distributions).
Roth IRAs don't have RMDs because you've already paid taxes on your savings when you made your contributions, so withdrawals are tax-free. But curiously, Roth 401(k) savers still had to take RMDs, even though these accounts are also funded with after-tax dollars.
The rule wasn't too difficult for most people to get around. If you rolled your Roth 401(k) over into a Roth IRA, you'd be able to avoid the RMDs and withdraw the money at your convenience. But things are about to get even easier for Roth 401(k) owners.
Beginning in 2024, Roth 401(k)s will no longer have RMDs. But if you are required to take an RMD from a Roth 401(k) for 2023, you still have to do so. Failure to take your RMD results in a 25% penalty on the amount you should have withdrawn, and that will probably hurt you more than just taking the money out of your Roth 401(k).
These things may not matter to you that much if you're still a long way from retiring, but they'll make a huge difference when you're ready to use your savings in retirement. Keep them in mind as you're planning your retirement withdrawal strategy, and stay alert to any future Roth 401(k) changes that could affect how you use this account.
