Information is essential to successful retirement planning. Investors need to know the difference between different types of deferred compensation plans so they can choose the right mix of plans for their needs. Many 401k account holders receive matching employer contributions to their accounts, and their contributions and earnings are tax deferred. Employees may wonder if their employers can also contribute to their Roth IRAs.
A 401k plan account is an employer-sponsored retirement account that employees may fund with payroll deductions. Many employers contribute to their employees' 401k plan accounts by matching each employee's contribution up to a maximum amount. The contributions and their earnings are tax-deferred. When an employee reaches retirement age and starts receiving distributions from the account, she pays income tax on her contributions, her employer's contributions and on her account's earnings.
An employee who participates in an employer-sponsored 401k plan may also own a Roth individual retirement account. She funds her Roth IRA with after-tax dollars, and the earnings on her Roth account are tax-free. Employees may withdraw their contributions, but not their account earnings, without penalty. If an employee withdraws his account earnings before he reaches retirement age, he will incur an early withdrawal penalty in addition to taxes on the withdrawal.
Designated Roth Contributions
An employer cannot contribute to an employee's Roth IRA. However, an employer can amend the company's 401k plan to create a designated Roth account, and employees may designate Roth contributions from their after-tax wages to their 401k accounts. An employer may match the employee's Roth contribution by depositing the matching funds as pretax dollars in the employee's account. When the employee retires, he withdraws his Roth contributions and their earnings tax-free, and he pays taxes on the employer's contributions and their earnings
The amount of money you can contribute to your retirement accounts is limited. As of the time of publication, you may contribute a total of up to $16,500 in any combination to your traditional 401k, a designated Roth account, a Roth IRA or a traditional IRA. If you are over age 50, you may also make catch-up contributions of up to $5,500 per year to your retirement accounts.
Marilyn Lindblad practices law on the west coast of the United States. She has been a freelance writer since 2007. Her work has appeared on various websites. Lindblad received her Juris Doctor from Lewis and Clark Law School.