An employer-sponsored Roth 401 (k) plan is similar to a traditional plan with one major exception. Employee contributions are not subject to deferred taxes, but are made with after-tax money. Accrued account income, for interest, dividends or capital gains, has been tax-free for 3 days. With a Roth 401 (k), the main difference is when the IRS keeps its share.
Additionally, a Gold Roth IRA account offers the same tax advantages as a Roth 401 (k), allowing you to save for retirement without having to pay taxes on your earnings. You make contributions to the Roth 401 (k) with money that has already been taxed, just like you would with a Roth Individual Retirement Account (IRA). So any earnings increase tax-free and you don't pay taxes when you start making withdrawals in retirement. 1.Another advantage is that your money also grows tax-free. Since a Roth 401 (k) account is funded with after-tax money, you won't pay any tax when you withdraw it, not even on the money earned through the investment.
Your employer can also match both options, but the funds from your traditional 401 (k) plan go directly to your account, while with a Roth 401 (k) plan, they are deposited in a separate tax-deferred account. Meanwhile, your Roth IRA disbursements will most likely be free of any type of tax burden (income or capital gains), as long as you comply with the five-year rule and are at least 59 and a half years old. If the participant has an established Roth IRA, the qualification period is calculated from the initial deposit in the IRA and the reinvestment will be entitled to tax-free withdrawals when that five-year period ends (and the age requirement has been met). Deciding if a Roth IRA is a worthwhile investment depends on many factors, including your investment objectives, current and potential future income, and your age.
And, once you withdraw from the IRA (Roth or traditional), you'll still not pay capital gains taxes. Proceeds from Roth 401 (k) contributions are eligible for tax-free treatment as long as the distribution occurs at least five years after the year you made your first contribution to the Roth 401 (k) and you are 59 and a half years old, have become disabled, or have died. For example, you can withdraw RMDs from your traditional account and withdraw what you need beyond that amount from the Roth account, without paying taxes. A major tax advantage of a Roth 401 (k) is the opportunity for people with higher incomes to contribute more dollars to a retirement account that will be tax-free when they retire.
However, you can avoid this requirement when you retire by transferring your Roth 401 (k) to a Roth IRA, which doesn't have an RMD. Now that you have a better understanding of a Roth 401 (k), you may be wondering how it's different from a Roth IRA. As a retired person or married couple with traditional Roth 401 (k) and 401 (k) accounts, you can determine which account to use based on your tax situation. For example, if you're 58 and plan to retire at 60, a Roth IRA might not be the best investment option, due to the five-year rule.
However, when it comes to paying for capital gains in a Roth IRA or a traditional IRA, capital gains taxes aren't likely to be an issue. As long as you meet the MAGI income requirements above, you can open a Roth IRA on your own as part of your retirement strategy.
