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RECOMMENDED

Consider offering Roth 401(k)

When you add the Roth 401(k) as a feature to your company’s traditional 401(k) retirement plan, you offer employees a choice of when their retirement investments are taxed: Now or later. Offering employees both options can help them implement strategies that work for their particular needs and financial situations.

Contributions to a Roth 401(k) account are taxed before they go into the account; and if certain conditions are met, no taxes are due when employee contributions—and any associated earnings—are withdrawn. Employer contributions, however, such as matching contributions, are taxed when withdrawn. This is in contrast with traditional 401(k) accounts, which are taxed only on withdrawal.

Roth 401(k) trends

Bank of America participants contributed $482.8 million to their Roth 401(k) accounts in 2018, a 14% increase over 20171
62% of participants who made Roth contributions also made pre-tax contributions2

While tax considerations are important, there are other plan rules that should factor into the decision as well:


Contribution limits

If you choose to offer a Roth 401(k), your employees can elect either pre-tax “traditional 401(k)” contributions or Roth contributions. The same contribution limits apply to either type of 401(k)—traditional or Roth, or the two combined if contributions are made to both. Catch-up contributions, if available under your plan, can also be made to either type of account, or both, by eligible participants.


Qualified distribution

For a “qualified distribution” (i.e. a federal tax-free distribution) to occur, the participant must be at least 59½ years old, disabled or deceased. State income tax laws vary; consult a tax professional to determine how your state treats Roth 401(k) distributions.


Five-Year Rule

There is also a “Five-Year Rule” which must be met. This requires at least five years elapse from the first day of the year of a participant’s initial contribution to a Roth 401(k) account and the first withdrawal. For purposes of this rule, contributions made at any time during the calendar year are treated as if they were made on January 1 of that year. Distributions that do not meet the requirements outlined above are non-qualified, and the earnings are subject to regular federal income tax and possibly additional taxes unless an exception applies. Other non-qualified distributions include corrective refunds and deemed distributions.


Restrictions

Roth 401(k) account distributions are subject to the same restrictions on distributions prior to “triggering events” as those which apply to traditional 401(k) contributions, as well as the same force-out rules and the same Required Minimum Distributions. With a Roth 401(k) account, employer contributions must be separately accounted for, since employer contributions are taxed upon withdrawal.

Who offers the Roth 401(k) feature?

Large companies: 59%3
Medium companies: 60%3

Key takeaways

Your Bank of America representative can help you decide whether to offer the Roth 401(k) contribution option. If you choose to offer your employees this feature, your service team will:

Help you plan, schedule and implement the rollout.

Help you amend your plan document to add the Roth contribution feature, which should be executed prior to withholding any Roth deferrals.

Work with you on any necessary changes to payroll files, forms, enrollment kits, etc.

Provide training and materials to help you communicate the availability to employees.

1 Bank of America data, 2018 versus 2017.

2 Bank of America data, as of December 31, 2018.

3 PLANSPONSOR, “Roth 401(k) Option Availability Increases with Company Size,” August 2017. Large companies defined as those with 500 or more employees; medium companies 100-499.