The maximum contribution limit for a Roth 401(k) has been raised for 2020. The "catch-up" contribution limit went up, too. That's especially good news for workers who have access to Roth 401(k) accounts through their employer and expect to be in a higher tax bracket in retirement.
>>For more 2020 tax changes, see Tax Changes and Key Amounts for the 2020 Tax Year.<<
Roth 401(k) Contribution Limits for 2020
The maximum amount you can contribute to a Roth 401(k) for 2020 is $19,500 if you're younger than age 50. If you're age 50 and older, you can add an extra $6,500 per year in "catch-up" contributions, bringing the total amount to $26,000. (These amounts are higher than in 2019.) Contributions generally need to me made by the end of the calendar year.
The Roth 401(k) first became available in 2006, and a majority of companies now offer it to employees, according to the Plan Sponsor Council of America. The Roth 401(k), as the name implies, combines features of the tax-friendly Roth IRA and the traditional 401(k).
A Roth 401(k) vs. a Roth IRA and a Traditional 401(k)
As with a Roth IRA, you make after-tax contributions to a Roth 401(k). This won't lower your tax bill now, but it will provide you with income in retirement that is free from taxes. You can make withdrawals from a Roth 401(k) tax-free, and without incurring a 10% early-withdrawal penalty, once you've turned age 59 1/2 and have had the account open for at least five years. (If you retire after holding a Roth 401(k) for only two years, for example, the money must sit for three more years to be fully tax-free, even if you own an older Roth 401(k) account from a previous employer that meets the five-year test.)
And as with a traditional 401(k), there are no income limitations with the Roth 401(k), making it an attractive option for high-earners whose salaries might disqualify them from contributing to an IRA. You can also sock away thousands of dollars more each year with a Roth 401(k) or a traditional 401(k) than you can with an IRA alone. The annual contribution limit for a Roth IRA is $6,000 for 2020, or $7,000 if you're age 50 or older. You'll be obligated to take required minimum distributions from a traditional 401(k) and a Roth 401(k) once you reach age 72. However, you can avoid RMDs from a Roth 401(k) by rolling over the money into a Roth IRA, which doesn't require minimum distributions.
How Much Should You Save in a Roth 401(k)?
Many employers match employees' 401(k) contributions up to a certain percentage of salary. Note that any employer contributions to a Roth 401(k) will be made pretax and will grow tax-deferred alongside your own Roth contributions. When you withdraw money, you will owe income tax on the employer match.
Melissa Brennan, a certified financial planner in Dallas, recommends that people save at least 15% of their income for retirement, including any employer match. If your employer contributes, say, 2%, then you would need to save an additional 13%.
"Every year, add another percentage point until the employee deferrals and the employer contributions reach a total of 15% of gross income," Brennan says. So if you're saving 3% now, bump that up to 4% next year, 5% the year after and so on.
Is a Roth 401(k) Right for You?
Stuart Ritter, a certified financial planner with T. Rowe Price, says Roth 401(k) plans are most beneficial for workers who don't anticipate that their tax bracket will decrease in retirement. This "usually includes younger people who expect their income to increase as they get older," Ritter says.
Brennan also recommends a Roth 401(k) for younger workers. If and when income increases substantially and their tax bracket is higher than it will likely be in retirement, it might make sense at that point to switch to pretax deferrals in a regular 401(k), she says.
(Note: If you invest in both a Roth 401(k) and a traditional 401(k), the total amount of money you can contribute to both plans can't exceed the annual maximum for your age, either $19,500 or $26,000 for 2020. If you do exceed it, the IRS might hit you with a 6% excessive-contribution penalty.)
Roth 401(k) Retirement Savings Tips
Advice for maximizing your Roth 401(k) account:
- Max out your contributions. For each year that you're able, aim to hit the $19,500 limit.
- Once you turn 50, add another $6,500 to that limit annually while you continue to work.
- If your employer offers to match your contributions up to a certain amount, be sure to invest at least that much in your Roth 401(k) each month. It's free money, after all.
Six Steps to Take if You've Recently Inherited Money From a Loved One
It’s important to deal with the emotional aspect first before tackling the financial one.
By Kiplinger Advisor Collective Published
Alaska Airlines to Buy Hawaiian: Get Bonus Miles Now
How to use the Alaska Airlines credit card and frequent flyer program to save on trips to Hawaii, Alaska and beyond.
By Ellen Kennedy Published
Is a Medicare Advantage Plan Right for You?
Medicare Advantage plans can provide additional benefits beneficiaries can't get through original Medicare for no or a low monthly premium. But there are downsides to this insurance too.
By Jackie Stewart Published
What You Must Know About the Different Parts of Medicare
Medicare Medicare can be complicated but we've got you covered. Here is a quick guide to the different benefits provided through each part.
By Jackie Stewart Last updated
Retirees, It's Not Too Late to Buy Life Insurance
life insurance Improvements in underwriting have made it easier to qualify for life insurance, which can be a useful estate-planning tool.
By David Rodeck Published
Best Banks for Retirees
banking Kiplinger's 2023 list of the best banks for retirees.
By Lisa Gerstner Published
Kiplinger's Tax Map for Middle-Class Families: About Our Methodology
state tax The research behind our judgments.
By David Muhlbaum Published
As the Market Falls, New Retirees Need a Plan
retirement If you’re in the early stages of your retirement, you’re likely in a rough spot watching your portfolio shrink. We have some strategies to make the best of things.
By David Rodeck Published
Retirees: Your Next Companion May Be a Robot
happy retirement Robots may help fill the gap left by a shortage of humans to help older adults live independently.
By Alina Tugend Published
Using Your 401(k) to Delay Getting Social Security and Increase Payments
retirement Your 401(k) can be a bridge from retirement to higher monthly income.
By Elaine Silvestrini Published