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The IRS has also imposed a total contribution—employee and employer—limit. The
maximum amount is the lesser of 100 percent of compensation or $45,000.
Catch Up Contribution Limits
Catch-up contributions were created as an option for those who haven’t saved
enough for retirement. If you are over the age of 50, you can make catch up
contributions as retirement draws near. The maximum contribution amount is
$5000. For future years these limits may adjust in $500 increments to account
for inflation.
Income Limits
There are no income limitations to participate in a Roth 401(k).
Contribution Deadlines
Employer contributions must be made by the company’s tax-filing deadline.
Investment Choices
There is a wide array of investment choices to take advantage of depending on
your plan provider, such as mutual funds, guaranteed interest vehicles,
equities, bonds, and so on.
Early Withdrawal
Early withdrawals taken prior to the required age of 59 1/2 are subject to
taxation and early withdrawal penalty of 10%. The IRS allows early
distributions for “hardships” that fall into these categories.
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Purchase of a primary residence
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To avoid foreclosure or eviction of a primary residence
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Medical expenses not covered by employees insurance
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Funeral expenses for parents, spouse, or dependants
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Payment of secondary education expenses
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Home repairs due to a deductible casualty loss
Another common form of early distribution from a Roth 401(k) is the ability to
take a loan against your plan that is to be repaid with after-tax funds at a
pre-determined rate of interest. As long as the loan is paid in full, the loan
will not be taxed or subject to the early-withdrawal penalty. General terms of
these loans are that the loan be extended for no longer than five years, that a
reasonable rate of interest is charged, and that equal payments over a
quarterly basis are made over the life of the loan. If for any reason you
default on the loan, the loan balance is taxed as a distribution and is
penalized as an early distribution.
Distribution Requirements
Once the employee reaches age 59 ½, they can begin to take normal
distributions. They are not subject to taxation.
Minimum distributions are required of account owners who are age 70 1/2, and
have yet to take distributions from the account. The distribution amounts are
based on IRS time tables and other relevant factors.
Rollover Restrictions
When you terminate employment with a company, you are given the option to
rollover your Roth 401(k) into a new company’s plan or into a Roth IRA. The
most common decision is to roll the account into a Roth IRA. IRA accounts offer
more investment choices than Roth 401(k) plans and are not subject to
restrictions imposed by the company.
The most efficient method of a Roth 401(k) rollover is a direct rollover. This
is where the company directly transfers your retirement funds to your IRA
provider or your new employers plan. By doing this it eliminates the chances of
federal tax withholding or incurring any early distribution penalties.
Potential Penalties
The most common penalties are for early withdrawal or a failure to take a
required minimum distribution. Early withdrawal results in a 10-percent penalty
on the amount distributed along with normal taxation on the amount withdrawn as
ordinary income.
The most severe penalty that the IRS applies is upon failure to make the
required minimum distribution, which is equal to 50-percent of the amount that
should have been withdrawn.
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