How much can i put in roth 401 k

If your employer offers a Roth option in your 401(k), it's a great idea to invest in it, or at least consider investing a portion of your 401(k) contribution in the Roth. Contributions to a Roth 401(k) won't reduce your tax bill now. While pretax salary goes into a regular 401(k), after-tax money funds the Roth. But as with Roth IRAs, withdrawals from Roth 401(k)s are tax- and penalty-free as long as you've had the account for five years and are at least 59½ when you take the money out.

Because there are no income limits on Roth 401(k) contributions, these accounts provide a way for high earners to invest in a Roth without converting a traditional IRA. In 2021, you can contribute up to $19,500 to a Roth 401(k), a traditional 401(k) or a combination of the two. Workers 50 or older can contribute up to $26,000 annually.

If you get matching funds from your employer, they go into a traditional pretax 401(k) account. However, a proposal in the Securing a Strong Retirement Act, which has been nicknamed the SECURE Act 2.0, would allow workers to have employer matching contributions invested in a Roth 401(k). The House Ways and Means Committee has approved the bill, though it still needs to be voted on by both chambers of Congress.

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401(k)s: 10 Things You Must Know About These Retirement Savings Plans

Consider the Benefits of a Roth 401(k)

Younger workers stand to gain the most from investing in a Roth 401(k) because they will enjoy many years of tax-free growth.

But older workers can benefit, too. Consider this example from Fidelity Investments: Tom and Elaine, both 45, contribute $5,000 to their 401(k) plans. Tom contributes to a traditional 401(k) plan, while Elaine contributes to a Roth. They continue to work into their seventies and don't take withdrawals until they're 75. If their tax rates and investment returns remain equal, Tom will end up with $27,404, after paying taxes on the withdrawal, while Elaine will have $38,061 tax-free (this example assumes a 7% annual rate of return and a 28% tax bracket). Even if Tom invested the $1,400 in tax savings he enjoyed by investing pretax money in the taxable account, he'd still lag Elaine by $2,616.

If you expect your tax bracket to decline when you retire, the Roth 401(k) loses some of its appeal, but it's still the superior option for many savers—even those who are close to retirement. If you take withdrawals from taxable and tax-deferred accounts and leave the money in the Roth for decades, tax-free earnings will continue to pile up.

If you plan to withdraw money from the Roth within 10 years and you expect your tax bracket to drop significantly in retirement, then you might come out ahead with a traditional 401(k) plan. But you'd lose the flexibility to take tax-free withdrawals for major expenses, such as home repairs or medical bills. And a large withdrawal from a tax-deferred account will increase your taxable income, which could affect everything from taxes on your Social Security benefits to the size of your Medicare premiums. Those worries disappear with a Roth because withdrawals are tax-free.

Although the rules require owners to take distributions from Roth 401(k)s starting at age 72, you can get around that by simply rolling the Roth account tax-free into a Roth IRA.

Should You Convert Your Traditional 401(k) to a Roth 401(k)?

The law now allows employees to convert funds from a traditional 401(k) plan to a Roth 401(k), if the plan allows it. About half of employers offer a Roth 401(k), according to 2017 data from Transamerica Center for Retirement Studies.

You'll have to pay taxes in the year you convert, just as you would if you converted a traditional IRA to a Roth. Plus, a large conversion could bump you into a higher tax bracket. Note that unlike converting from a traditional IRA to a Roth, you can't change your mind and undo a 401(k) conversion to a Roth.

A Roth 401(k) is a good option for workers who have access to one through their employer and expect to be in a higher tax bracket when they retire. As an added bonus, the contribution limit for 2022 has increased.

2022 Roth 401(k) Contribution Limits

The maximum amount you can contribute to a Roth 401(k) for 2022 is $20,500 if you're younger than age 50. This is an extra $1,000 over 2021. 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 $27,000. Contributions generally need to be made by the end of the calendar year.

The Roth 401(k) first became available in 2006, and many companies now offer this option to workers. The Roth 401(k), as the name implies, combines features of the tax-friendly Roth IRA and the traditional 401(k).

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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 a Roth 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 2022, 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.

Invest in a Roth 401(k) If You Can

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.

Experts recommend that workers save at least 15% of their income for retirement, including the employer match. For example, if your employer contributes, say, 2%, then you would need to save an additional 13%.

If you are currently saving below the recommended 15% annually, increase your contribution every year until you reach that goal. For instance, if you are contributing 5% this year, boost that to 7% next year and so on until you reach 15%.

Is a Roth 401(k) Right for You?

Roth 401(k) plans can be beneficial to workers who don't expect their tax bracket to decrease during their retirement. This may include younger employees who anticipate their income increases as they age. If a worker’s earnings increase dramatically and their tax bracket is higher than it will be in retirement, then it could make sense to switch to pretax deferrals in a regular 401(k).

(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 $20,500 or $27,000 for 2022. If you do exceed it, the IRS might hit you with a 6% excessive-contribution penalty.)

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