An After-Tax Roth 401(k) Provides Tax-Free Withdrawal Options
An increasingly popular type of contribution option being added to 401(k) plans is the Roth 401(k). Roth contributions are made on an after-tax basis, so you don’t get an up-front tax deduction. But once you meet certain qualifications, all withdrawals from a Roth 401(k) account—including investment earnings—are completely tax-free.
By offering both pre-tax and after-tax Roth contribution options, you give your employees more flexibility in future tax planning. If employees make both types of contributions, they will have the option of choosing between taxable and tax-free withdrawals during retirement. Providing choices is a great way to give your employees more control over their retirement savings.
Unlike the Roth IRA, which limits how much you can contribute based on your income, a Roth 401(k) is only limited by the annual contribution limits set by the IRS for qualified plans. For 2014, that limit for individuals is $17,500 a year.