Exploring the Roth 401(k)

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1 Exploring the Roth 401(k)

2 Our Purpose Today What is the Roth 401(k)? How does it differ from traditional 401(k)s? How does it differ from Roth IRAs? Other points to consider Is the Roth 401(k) right for me?

3 What Is a Roth 401(k)? Roth 401(k) complements the traditional 401(k) employers may offer. Different tax treatment allows flexibility in retirement-planning strategies. Traditional 401(k): Tax benefits now, pay taxes later Roth 401(k): No tax benefits now, tax-free income later

4 The Tax Differences of a Roth 401(k) You contribute after-tax dollars to your retirement plan. Money grows tax-deferred. Withdrawals are tax free, provided you have reached age 59½ and have held the account for at least five years.

5 How Much Can You Contribute? Annual contribution limits are the same for traditional and Roth 401(k)s. You can contribute up to $18,000 in An additional $6,000 contribution is allowed in 2016 if you are 50 or older. Contributions may be split between traditional and Roth 401(k) accounts.

6 What About Employer Contributions? Employer contributions are invested in a traditional tax-deferred account. Taxes must be paid on these assets upon withdrawal.

7 A Note About Early Withdrawals Early withdrawals may be subject to a 10% penalty tax, in addition to regular income taxes on the investment earnings. Exception for conversion: Tax rules allow conversion from a traditional plan to a Roth-style plan without first meeting one or more of the IRS qualifying event rules. If not converting, penalty-free distributions for extreme financial hardship, disability, and death are allowed.

8 How Does a Roth 401(k) Compare With a Roth IRA? Tax treatment for contributions and earnings is the same. Roth 401(k) not subject to income eligibility rules. Contribution limits are higher with a Roth 401(k).

9 Rollovers and RMDs Money in a Roth 401(k) can be rolled over to a Roth IRA or another Roth 401(k) plan when you retire or change jobs. A rollover preserves the tax advantage. Required minimum distributions (RMDs) from Roth 401(k) plans must begin after age 70½. A direct rollover to a Roth IRA will avoid the need for RMDs. After-tax contributions to employer-sponsored retirement plans can now be rolled over into a Roth IRA tax free.

10 The Roth 401(k) and the Roth IRA: A Powerful Estate Planning Combination A rollover can help transfer wealth to the next generation. Account can continue to potentially grow far into retirement. Assets can be passed on to heirs tax free. Heirs may be able to stretch out withdrawals.

11 Transferring Wealth Roth IRA inherited by 25-year-old Lisa: Roth IRA value at John s death $50,000 Lisa s cumulative after-tax RMDs by age 65 $203,912 Remaining after-tax value of account at age 65 $362,248 Total after-tax wealth passed to Lisa at age 65 $566,160 This example does not take into account potential estate and/or generation skipping taxes, changes to tax laws, or inflation. It assumes a 6% average annual rate of return. Actual results may vary.

12 Investment Options Getting to know the risk/return equation: S T O C K S B O N D S R I S K C A S H R E T U R N

13 The Power of Time Contributing Early Helps Investment Results Source: DST Systems, Inc. This example is hypothetical and cannot be guaranteed.

14 Summary: Roth 401(k) vs. Traditional 401(k) Principal Differences Roth 401(k) After-tax contributions don t affect current taxable income Distributions after age 59½ are tax free if account is held for 5 or more years Eligible for employer match but matching contributions must be held in a separate account and taxed as current income upon withdrawal Eligible for rollover to Roth IRA or another employer s Roth 401(k) Traditional 401(k) Pretax contributions reduce taxable income Distributions after age 59½ taxed as current income Eligible for employer match Eligible for rollover to traditional IRA or Roth IRA

15 Summary: Roth 401(k) vs. Roth IRA Similarities and Differences Roth 401(k) Contributions taxable in year contributed Distributions after age 59½ are tax free and penalty free if account is held for 5 or more years No income limits imposed Roth IRA Contributions taxable in year contributed Distributions after age 59½ are tax free and penalty free if account is held for 5 or more years Annual income limits apply Subject to required minimum distribution (RMD) rule Not subject to required minimum distribution (RMD) rule

16 Making a Decision Do you need the tax break of pretax contributions? Are you likely to be in a higher tax bracket in retirement? What is your estate plan? How long do you have to save?

17 Closing Thoughts

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