Roth 401(k) Frequently Asked Questions
Roth 401(k) Frequently Asked Questions
General Overview
What is a Roth 401(k)? Is it a new type of plan? No, it is not a new type of plan. Designated Roth contributions are a new type of contribution that can be accepted by new or existing 401(k) plans which allow participants to put aside after-tax dollars for retirement. Because Roth 401(k) contributions have already been taxed--unlike traditional 401(k) contributions, which are made with pre-tax dollars--Roth 401(k) contributions and any investment earnings can generally be withdrawn tax-free. To avoid paying taxes on your Roth 401(k) withdrawals, your account must be held for at least five years and you must be at least 59? or the distribution must be due to disability or death.
Is the Roth 401(k) a separate plan from the existing Plexus Corp. 401(k) Retirement Plan? No. The Roth 401(k) is a new feature being offered within the Plexus 401(k) Plan.
Why is it called the Roth 401(k)? The Roth 401(k) is so named because it combines features of the traditional 401(k) with those of a Roth IRA. Roth 401(k) contributions are automatically deducted from your paycheck, just like a traditional pre-tax 401(k). However, since you are contributing with after-tax dollars (and hence may later benefit from tax-free withdrawals), it also shares the features of a Roth IRA.
What are the differences between the Roth 401(k) and the Roth IRA? The main difference is that the Roth 401(k) is part of an employer sponsored retirement plan while the Roth IRA is an individual retirement account, typically offered by a financial institution. Contributions to a Roth 401(k) are made directly from salary deferrals. Both the Roth 401(k) and Roth IRA provide similar tax benefits upon distribution. In addition, unlike the Roth IRA, there are no income restrictions on Roth 401(k) eligibility.
Can I contribute to a Roth 401(k) and a Roth IRA? Yes, assuming that you are not prohibited from contributing to a Roth IRA based on your adjusted gross income.
What are the differences between the traditional 401(k) and the Roth 401(k)? The main difference is that traditional 401(k) contributions are deferred from a participant's pay on a before-tax basis while Roth 401(k) contributions are made on an after-tax basis. Traditional 401(k) contributions are taxable to the participant upon distribution from the plan while Roth 401(k) contributions are generally not taxable when distributed.
Do I have to choose one or the other? You can choose to contribute to the Roth 401(k) and pay taxes on your contribution now, you can stay with the traditional 401(k) and pay taxes later, or you can choose to participate in both. It's your choice, so take some time to understand your options so that you can choose what's best for you.
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Who is eligible for the Roth 401(k)? Eligibility requirements for the Roth 401(k) are the same as the requirements for the regular Plexus 401(k) plan: you will become eligible for the Plan on the first day of the month after your hire date.
Who should contribute to the Roth 401(k)? Because withdrawals are tax free, the Roth 401(k) may be a good option for participants who: ?
Are currently in a lower tax bracket and expect to be taxed at a higher rate in retirement. For instance, this may be the case for younger workers who are just starting their careers and expect their income--and associated taxes--to increase over time.
Prefer to pay taxes now, rather than later. By paying taxes up front, you gain a clearer understanding of exactly how much money you'll have for retirement. Because you've already paid taxes on this money, your Roth 401(k) account balance at retirement represents exactly how much money you can withdraw and spend.
Seek to do with less money now in order to have a potentially bigger nest egg later. If you're in your highest earning years--typically workers who are age 35 to 55--you may want to sacrifice a few dollars now to have more after-tax dollars in retirement, when your income has either stopped or been reduced.
Can I choose to invest my Roth 401(k) contributions differently than my traditional pre-tax 401(k) contributions? No. The investment elections you make in the 401(k) Plan apply to all contribution sources.
Employee and Company Contributions
Are there any limits as to how much I may contribute as designated Roth 401(k) contributions? Yes, you can make both designated Roth and traditional pre-tax contributions in any one year for any one individual up to the IRS limits* of $18,500 plus an additional $6,000 in catch-up contributions if age 50 or older. This limit does not include company matching contributions.
Deferra*l limit represents a combined contribution total of pre-tax 401(k) and Roth 401(k) contributions. Regardless of how you divide your contributions between pre-tax 401(k) and Roth 401(k), if at all, you cannot exceed the deferral limit. Limits above are for the 2018 year.
Do the deferral limits include the amounts that Plexus may contribute on my behalf? No. These limits only apply to the amounts you contribute to the Plan through payroll deduction. In addition to your deferral limits, Plexus will match 100% of the first 4% of your contribution (Roth or pre-tax).
Can Plexus make matching contributions on my designated Roth contributions? Can the matching contributions be allocated to my designated Roth account? Plexus will match 100% of the first 4% that you contribute to the plan regardless of whether your contribution is pre-tax or designated Roth. However, only an employee's designated Roth contributions can be allocated to Roth accounts. The safe harbor matching contributions on designated Roth contributions must be allocated to the pre-tax company safe harbor match account, just as the matching contributions on traditional, pre-tax elective contributions are. If I elect to make designated Roth 401(k) contributions are. If I elect to make designated Roth 401(k) contributions to the Plan can I later ask that the contributions be re-characterized to be treated as pre-tax contributions? No, the election to make designated Roth 401(k) contributions is irrevocable. Once they are designated as Roth 401(k) contributions, they cannot later be changed to pre-tax elective contributions.
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Can I elect to have my existing balance in the traditional pre-tax 401(k) account converted to the Roth 401(k) account? No. Because these balances will be subject to different rules for taxation, they must be kept separate.
Can I switch from making Roth 401(k) contributions to pre-tax 401(k) contributions, or vice-aversa, during the Plan Year? Yes. You may change your future deferral elections at any time. Any changes made by the 20th of any given month will be effective on the first paycheck of the following month.
Will MassMutual track my Roth 401(k) account separately from my traditional pre-tax account? Yes. Designated Roth 401(k) contributions must be kept completely separate from previous and current 401(k) pre-tax elective contributions. A separate bucket will be established within your 401(k) account for your Roth 401(k) contributions.
Can my age-50 catch-up contributions be made as a designated Roth 401(k) contribution to my designated Roth 401(k) account? Yes, you can designate your catch-up contributions as Roth contributions.
Distributions
When can I withdraw money from a designated Roth 401(k) account? The restrictions on withdrawals that apply to pre-tax elective contributions also apply to designated Roth 401(k) contributions. Under the Plexus 401(k) Plan you would be able to request a distribution of your funds upon termination of employment, disability, death, attainment of age 59 1/2 and, in certain situations, hardship (as defined by the Plan and the IRS).
Under what circumstances will a distribution from my designated Roth 401(k) account be free from federal taxation? In order for a distribution from a Roth 401(k) account to be free from federal taxation, it must be a qualified distribution. A qualified distribution is generally a distribution that is made 5-taxable-year periods after you made your initial contribution to the Roth 401(k) account and that either:
1. is made on or after the date the employee attains age 59?, 2. is made after the employee's death, or 3. is attributable to the employee being disabled.
If a distribution from a Roth 401(k) is not qualified, then the earnings portion of the account will be subject to regular taxation and may be subject to an additional 10% excise tax if the participant is under age 59?.
Are there state taxes on Roth 401(k) distributions at retirement? Although qualified Roth 401(k) distributions are not subject to federal taxation, certain states may tax the portion of the distribution that exceeds your Roth 401(k) contributions. Please contact your tax advisor to determine the applicability of state tax, if any, on qualified Roth 401(k) distributions.
What if I receive a distribution from my Roth 401(k) account that is not qualified? You receive a proportionate amount of both your principal contributions and any earnings. The portion of the distribution that represents Roth contributions is tax-free, and any earnings are taxable and subject to the 10% additional tax if you are not age 59 ?.
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If I withdraw a portion of my designated Roth 401(k) account, as in the case of a hardship withdrawal, which portion of the distribution will come from contributions and which portion will come from the earnings in the account? Such a distribution will consist of a pro-rata share of earnings and contributions and the earnings will be included in your gross income unless you have had the designated Roth 401(k) account for five years and are either disabled or over age 59 ?.
If I have both pre-tax 401(k) and Roth 401(k) contributions in my account and I am requesting a partial withdrawal from the 401(k) Plan, can I designate from which contribution source the distribution will be withdrawn? Yes.
Is the five year requirement a rolling date or does it look only at the date I made my first Roth 401(k) contribution? The five year qualification requirement begins in the calendar year in which the participant first makes a contribution to a Roth 401(k) account.
If I roll over my Roth 401(k) into a Roth IRA, do I need to wait another 5 years before I can take tax-free distributions? Perhaps. The 5-year period applies separately to Roth 401(k)s and Roth IRAs; therefore, a new 5-year clock begins when the Roth 401(k) rollover is deposited to the Roth IRA account. However, if:
a) You have a Roth IRA account that satisfies the 5-year requirement, then distributions from the rollover Roth IRA are immediately available on a tax-free basis assuming you are age 59 ? , disabled or deceased; or
b) The rollover previously qualified for tax-free distribution from a Roth 401(k) account, then distributions from the rollover Roth IRA are immediately available on a tax-free basis.
Can I roll my Roth IRA into the Roth 401(k) plan? No. A Roth IRA can not be rolled over into a Roth 401(k) plan.
Do age 70? RMD (required minimum distributions) apply to the Roth 401(k)? Yes.
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PlexusRothQA 12/17
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