The Roth Option is available in many US employer-sponsored retirement plans, allowing taxpayers to contribute out of their net earnings. Withdrawals from Roth accounts are exempt from federal income tax, making them attractive to high earners. The IRS imposes annual contribution limits, and early withdrawals are subject to tax penalties. Most plans offer a variety of investment options.
A Roth Option is an investment election available to participants of many employer-sponsored retirement plans in the United States (US). Under the federal tax code in the United States, taxpayers are generally able to make pre-tax retirement plan contributions. The Roth option allows taxpayers to contribute out of their net rather than gross earnings.
Standard pre-tax retirement contributions are fully taxable, but withdrawals from Roth accounts are exempt from federal income tax. This means that Roth accounts offer tax savings over traditional pensions because account earnings are never taxed. While employers may make comparable contributions on behalf of employees to pre-tax standard accounts, employers are not permitted to make contributions to Roth accounts. If an employee chooses to take advantage of the Roth option, any employer contributions that match are deposited in a separate pre-tax account.
Roth accounts were originally designed as a type of individual retirement arrangement (IRA) where individuals could deposit a portion of their net income. Unlike employer-sponsored plans, Roth accounts are opened and managed by taxpayers, and income restrictions prevent high earners from establishing these accounts. There are no income restrictions on Roth retirement plans, which means employer-sponsored plans with a Roth option are particularly attractive to high-paying employees.
To keep people from funneling all of their money into tax-free Roth accounts, the Internal Revenue Service (IRS) imposes annual contribution limits on these accounts. While these limits change from year to year, the maximum contribution limits on Roth pensions are typically higher than the limits on Roth IRA accounts. Some companies choose not to include a Roth option in corporate retirement plans in order to minimize the administrative costs associated with plan sponsorship.
Once contributions have been made to a Roth retirement plan, participants cannot make withdrawals from the plan until they reach the national retirement age determined by the IRS. Early withdrawals are subject to a tax penalty and normal income tax. Only account earnings, rather than participant contributions, are subject to these taxes. In addition to the federal income tax, retirement plan participants in many states also have to deal with the state income tax. In most cases, state authorities do not tax Roth withdrawals except for early withdrawals.
Most employer-sponsored retirement plans include several investment options. Typically, these options include a variety of mutual funds and fixed-interest accounts. Investors who choose to take advantage of the Roth Option can typically deposit their funds in the same accounts as their investing counterparts in pre-tax retirement accounts.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
