Video: Roth 401k An Alternative Retirement Plan Option Transcript

[PNC Employee Education]

Hello and thank you for joining today's webinar. We are going to discuss the Roth 401(k), which is an alternative Retirement Plan option.

We're going to break it down into four sections. The first section we're going to cover is what is a Roth 401(k)?

We will also talk about the Roth 401(k) features, followed by Roth 401(k) considerations. And lastly, I'll wrap up the presentation by discussing a summary.

So, let's start with our first section. What is a Roth 401(k)?

You may be familiar with the traditional 401(k) option, where money can be put in on a pre-tax basis and taxes on the money are deferred until they're withdrawn.

The Roth 401(k), which was created in 2006, is also a Retirement Savings Plan, sponsored by an employer, but this plan allows its participants to contribute on an after-tax basis.

It may appeal to employees who are willing to forego a tax break now in return for getting one at retirement. As its name implies, the Roth 401(k) combines features of a traditional 401(k) with those of a Roth IRA. However, unlike the traditional pre-tax 401(k), income tax is paid up front, so, the employee's income is reduced by the amount that's taken out for savings.

But no further taxes will be owed on the distribution, including any of those earnings, as long as, it is qualified.

So, what is a Qualified Distribution? They're only applicable to Roth 401(k) accounts, and the criteria are as follows:

You must be age 59 and a 1/2 or older, and the account has to be open for five taxable calendar years. If you satisfy both criteria, the money can come out tax free, and that's including any of the earnings.

As we just mentioned, tax free distributions are one of the many benefits from utilizing a Roth 401(k).

Other benefits include the ability to pay your taxes on any future retirement income and avoiding any Required Minimum Distributions

Right now, rolling the money after separation from service from an employer into a Roth IRA will do that, but keep in mind, that starting in 2024, all Roth 401(k)s will not have a Required Minimum Distribution.

Another benefit of a Roth 401(k) is that any beneficiaries will receive tax free assets in any distributions from your estate.

Let's go over the specific features of a Roth 401(k). Participants can make contributions to a traditional 401(k) on a pre-tax basis and that will reduce the current taxable income.

In the Roth 401(k), contributions are made on an after-tax basis, so, they do not reduce your current taxable income. The contribution limits, set by the IRS each year, apply to both the traditional and Roth 401(k)s.

And you see the numbers on there for 2023, they can change every year.

Participants can contribute the entire limit to a before-tax 401(k) account, or to an after-tax or Roth 401(k) account, or to both. The IRS limits for employee contributions, however, apply to the total of your contributions in all accounts combined. For catch up contributions, we can contribute more after the age of 50. In this example, you may be able to contribute an additional $7,500 in 2023.

They're the same for both the traditional and Roth 401(k) plans.

For any employer or company contributions, if your plan has employer or company contributions, they're eligible for both options, as well. However, the earnings may be taxable in a Roth 401(k), depending on how the individual plan is set up through the employer.

As previously noted, all contributions and earnings in a traditional pre-tax 401(k) are taxed at the time of the distribution, but with the Roth, as long as the distributions are qualified, the contributions and earnings are not taxed.

For traditional pre-tax plans, Required Minimum Distributions do begin at age 73, and right now, they still do with the Roth, unless they're rolled into a Roth IRA.

Beginning in 2024, for the Roth, there will be no minimum distribution requirements.

And with either plan, pre-tax or Roth, there may also be loan and hardship withdrawals out of either option.

Other contribution election features do include no income limitation. There's no separate eligibility requirements in a Roth 401(k), as you would have with a Roth IRA; however, you must designate contributions and your election cannot be revoked.

Money cannot move from the Roth into a traditional 401(k) account.

You can change the amount you're deferring to either option as often as the plan permits.

And for In-Plan Roth conversions, which is an option that moves assets from the traditional into the Roth portion, may be available in some plans. Any of your contributions into the Roth, as with the traditional are fully vested immediately, and they cannot be forfeited back into the plan.  For any eligible employer company contributions, the same rules apply for contributions and vesting in the Roth as they do for a traditional pre-tax 401(k) plan.

As stated earlier, distributions from employer contributions, including any earnings, may be taxed depending on how the plan was set up.

As with any type of withdrawal, or distribution, we encourage you to first consult with a tax advisor before proceeding.

Regarding withdrawals and distributions, they're considered the same in the traditional and the Roth options, but there may be differences in the way they're taxed based on the plan.

Any Roth 401(k) distributions must meet the qualifications before getting any tax-free benefits at the time of the withdrawal.

So, let's look at an example of a qualified distribution from a Roth 401(k) account.

Bob is 58 and made his first Roth contribution on July 1, 2016.

Therefore, he's eligible to receive his first qualified distribution on January 1, 2021.

This distribution fact satisfies the five year and age 59 and a 1/2 requirements because he was at least 62 years old when the money was withdrawn, and the five years began with his first contribution.

If a distribution is taken from a Roth 401(k) that does not meet the qualification requirements, all earnings will be subject to income taxes and possibly subjected to a 10% early withdrawal penalty, depending on age. Rollovers were mentioned earlier in this presentation.

In terms of Roth 401(k), any direct rollover to another qualified plan will allow the five year clock to keep running, if the participant hadn't reached that five years before the rollover.

A Roth IRA, right now, does offer a participant the ability to avoid any Required Minimum Distributions from their account on any money moved in from a Roth 401(k).

Again, after 2024, that Required Minimum Distribution requirement will no longer apply to a Roth 401(k).

Any income requirements or gross income limits with a Roth IRA do not apply to any money rolled in from a Roth 401(k).

But to qualify a distribution from a Roth IRA, participants do have to wait five years when that IRA is opened, even if those assets from a Roth 401(k) hit that five year marker.

Now let's talk about some things to consider when choosing a Roth 401(k).

Possible tax rate considerations: What will the tax status be of your assets in retirement?

You know, future tax rates are difficult to predict, but:

If you do expect to be in a higher tax bracket, the Roth 401(k) might be right for you. If you expect to be in a lower tax bracket, you might want to consider the traditional pre-tax 401(k) and those pre-tax contributions.

Of course, you can do one or the other, but you can also do both provided you don't exceed those IRS contributions each year.

If you're considering switching some or all of your pre-tax deductions into the Roth 401(k) option, please note it could impact your take home pay and possibly change your income tax bracket. Because the Roth 401(k) contributions are after-tax, they could reduce the net amount of your paycheck.

And because of the switch, your tax bracket may change to a higher one.

So, to sum everything up, you can contribute to both sources in your Retirement Plan, if the Roth 401(k) is available, up to the current year IRS limits. You can avoid any Required Minimum Distribution requirements now by rolling the Roth 401(k) into a Roth IRA.

Then beginning in 2024, there will no longer be Required Minimum Distributions in a Roth 401(k).

To receive any qualified distribution, the account has to be open for five taxable calendar years, beginning with the first contribution and if that withdrawal occurs after the age of 59 and a 1/2.

Capitalizing on every option available to you may make it easier to pursue your retirement investing goal.

If tax-free withdrawals could potentially benefit you, and your employer does make a Roth 401(k) available, you may want to consider adding a Roth 401(k) to your retirement planning mix.

Thank you for taking the time to learn more about the Roth 401(k).