The Roth 401(k) plan, which couples the features of a traditional 401(k) plan and a Roth IRA, provides employees with such features and benefits through which employees can plan and save for their retirement effectively. Employees make after-tax contributions to the Roth 401(k) account where their contributions and earnings on investments from the contributions, grow tax-free. The funds are also exempted from taxation upon making qualified withdrawals. There are other benefits as well which make the Roth 401(k) plan a lucrative option for many.

Some of the benefits of Roth 401(k) account are as follows.

• No income limits – Anyone can contribute to the plan, regardless of their income bracket.

• Tax free earnings – The funds in the Roth 401(k) account, the investments from the account and the earnings from the investments in the account, all grow tax free. The funds are not taxed even when a qualified withdrawal is made from the account. The only rule that applies is that the withdrawal must be made 5 years from the date of starting the account and that the account holder must be 59 ½ of age when making the withdrawal.

• Avoid Required Minimum Distributions – One does not have to take ‘required minimum distributions’ from the Roth 401(k) account after attaining the age of 70 ½ as they can rollover the funds to a Roth IRA after retirement or separation from job (this has to be done before they attain the age of 70 ½).

• Higher contribution limits – Employees or self-employed individuals wanting to contribute after-tax dollars to retirement funds are limited by lower contribution limits of Roth IRA ($5,000 if below the age of 50 and $6,000 if above 50). With Roth 401(k) they get higher contribution limits where they can fully contribute to the account up to $16,500 if they are below 50 and $22,000 if they are above 50. (however this limit applies cumulatively to all 401(k) accounts)

• Portability – Portability is another benefit of the Roth 401(k) account. After retirement or separation from service, one can opt to rollover all the funds tax-free into a Roth IRA. This option also enables the account holder with a provision to transfer the funds to their heirs/beneficiaries, tax free after death.

• The Roth 401(k) is especially beneficial to employees who think that they will be in higher income bracket in near or distant future or retirement. If they contribute now, they will save on taxes later on.

The after-tax contribution feature is seen as a benefit by those who are already in higher income brackets and also those who think that the income taxes will only go up in the future due to the present economic scenario. Employees or individuals who work in states with no state income tax may find a unique benefit of the Roth 401(k) plan. Since the contributions are after-tax, these people save more on tax as they do not pay state income tax and can especially save more if they retire in states which have income tax because qualified withdrawals of Roth 401(k) are tax free as well. Whereas if they have a traditional 401(k) and retire in a states with state income taxes, they would pay federal income tax as well as state income tax on withdrawals.