roth 401k income limit

Roth 401k income limit

Understanding Roth 401k income limit and why this limit was enforced in details:

If you aren’t already familiar with what Roth 401k income limit is then here is a quick background! It is an “employer-sponsored investment savings account” that imposes no taxes on you upon withdrawal. Roth 401k is the perfect mix of both Roth IRA and 401k, utilizing the best of both worlds. It uses Roth IRA’s no-tax withdrawal tendency and 401k’s larger contribution limit, thus being beneficial to all. No wonder it is suddenly trending!

What is the Roth 401k limit?

Now that we’re clear about what Roth 401k is, you must be wondering about its income limit.

Like every other tax-deferred retirement plan, Roth 401k has its limits on contribution. With every year the limits have increased from $18,500 in 2018 to $19,000 in the year 2019. Now, in 2020 the plan further increased its contribution limit to $19,500 so you can get raising benefits right after you retire!

Unlike the year 2018 when the annual limit was $5,500, now you can contribute up to $6,500 annually to your account. Hold up, are you 50 years old or above?


Here’s stunning news for you at 711 finance! The Roth 401k allows its customers to contribute an extra $1,000 for anyone above 50 years old. That pushed your annual limit to $7,500. But, keep in mind that the amount you add into the account is after-tax that means tax will be deducted before the money is added into your account.

Roth 401k Eligibility criteria

Before we dig deeper into understanding Roth 401k income limit and why this limit was enforced in the first place, we need to know who can actually use the Roth 401k tax-deferred plan.


Any company that offers a Roth option, its employees are eligible to use this tax-deferred plan. Unlike Roth IRA, Roth 401k offers unlimited income limits, meaning higher earners can also use this plan for their comfort during their retirement days.


Everything you need to know about the limit on Roth 401k

Coming to the topic of the limit imposed on Roth 401k, it can be observed that the limit is clearly based on age. A normal individual can contribute up to $19,500 whereas those at least 50 years of age can contribute $7,500 annually!


As for the withdrawals, the best part is that none of them are taxed. This is because the amount contributed is the one available after the tax deductions. Now, considering the withdrawal age limit, there are a few criteria to be kept in mind:


  1. The Roth 401k account should have been in the individual’s possession for over 5 years.
  2. The withdrawal may occur in case of the following three situations:
  • The account holder has reached the age of 59 and a half (at least).
  • The holder is disabled and requires the money.
  • The holder has passed away.


Moving forward to the required minimum distributions, the set age limit is 70 and a half. But in the case that one is still employed at the before mentioned age, required minimum distributions aren’t a requirement anymore. There is a catch to this rule though! If the individual owns at least a 5% share of the employing company, then he is not exempted from the distributions. He has to start the required minimum distributions then, at age 70 and a half, no matter what!


Why was this limit enforced?

Are you familiar with the famous quote that goes like this, “The rich get richer while the poor get poorer”?


Well…, the contribution limit was enforced on the Roth 401k plan for the same reason. Since the tax-deferred plan assists the employee to save their income for their retirement days, it helps the earner gather immense amounts of money. If the limit was revoked, highly paid employees would have benefitted by this system much more in contrast to the average worker.

The prime purpose of the Roth 401k limit is to equally benefit the average worker who can finally enjoy the fruit of their life long hard work in their retirement days. The contribution limit plays a key role in keeping the rules and regulations of the tax-deferred Roth 401k intact.


How Roth 401k limit plays a role in your retirement?

The Roth 401k uses after-tax contributions that allow its account holders the ease to withdraw the amount at any time without paying taxes. This system is extremely beneficial to workers who have a possibility to land in a higher tax bracket during their retirement.


Using a Roth 401k plan is the optimum choice to make at any point in your career because running around paying taxes is the last thing you’d want to do when you’re old.


Moreover, the Roth 401k contributions are capped restricting higher-paid workers from taking unfair advantage of this tax system.


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