Roth 401(k) plans offer unique tax advantages, but eligibility is subject to certain income limits. This guide explores the income thresholds that determine whether a Roth 401(k) is a suitable retirement savings option.
Roth 401(k) Income Limits for 2023
- Contribution Limit: $22,500 ($30,000 for individuals age 50 and older)
- Phase-Out Range:
- Single filers: $138,000 – $153,000
- Married filing jointly: $218,000 – $228,000
- Married filing separately (must live apart from spouse for the entire year): $0 – $10,000
When a Roth 401(k) May Not Make Sense
High Earners:
- Individuals earning above the phase-out range are not eligible to contribute to a Roth 401(k).
Limited Tax Savings:
- Roth 401(k) contributions are made after-tax, meaning there is no upfront tax deduction.
- For high earners who are already in a high tax bracket, the tax savings upon retirement may be minimal.
Estate Planning Considerations:
- Roth 401(k) distributions are tax-free, which can be beneficial for heirs.
- However, if the account holder passes away before age 59½, there may be additional taxes and penalties on withdrawals.
Alternatives to Roth 401(k) for High Earners
- Traditional 401(k): Pre-tax contributions reduce current taxable income, but distributions are taxed as ordinary income in retirement.
- Backdoor Roth IRA: Allows high earners to contribute to a Roth IRA indirectly by converting funds from a traditional IRA.
- Mega Backdoor Roth: Similar to a backdoor Roth IRA, but utilizes after-tax contributions to a 401(k) plan that are then converted to a Roth IRA.
Roth 401(k) plans can be valuable retirement savings tools, but income limits and tax implications should be carefully considered. High earners may find that traditional 401(k) plans or alternative strategies offer greater benefits. Consulting with a financial advisor can help individuals determine the most suitable retirement savings options based on their specific circumstances and financial goals.
Should You Use a Roth 401(k) If You Have a High Income?
FAQ
What income level should you not do a Roth 401k?
At what point does a Roth 401k not make sense?
What income is too high for Roth 401k?
What are the income rules for Roth 401k?
Does a Roth 401(k) have an income limit?
Roth 401 (k)s don’t have an income limit for contributions. You can only make contributions to a Roth IRA if your modified adjusted gross income (MAGI) is less than $153,000 for single filers or $228,000 for married couples filing jointly or a qualified widow (er) for 2023. For 2023, Roth 401 (k)s must take RMDs if over age 73.
Will a Roth 401(k) make more sense in retirement?
But the Roth 401 (k) could make more sense if you think your income will be higher in retirement because you won’t owe taxes on qualified Roth 401 (k) distributions. Will Tax Rates Be Higher When You Retire?
Are Roth 401(k) contributions taxable?
A Roth 401 (k) is a type of 401 (k) that allows you to make after-tax contributions and then get tax-free withdrawals when you retire. Traditional 401 (k)s, on the other hand, allow pre-tax contributions and the withdrawals in retirement are taxable. » On track for retirement? Use this 401 (k) calculator to see where you are
Is a Roth 401(k) right for You?
The Roth 401 (k) brings together the best of a 401 (k) and the much-loved Roth IRA. It features: There is no income limit for a Roth 401 (k). The Roth IRA’s after-tax contributions, so qualified withdrawals are tax-free. It can be hard to turn your back on those attributes, but is a Roth 401 (k) suitable for you? Here are the factors to consider.