Adding features such as after-tax Roth contributions, catch-up provisions and automated features is an attractive way to customize your retirement plan to meet the needs of your employees and your company.
Setting up your 401(k) or 403(b) plan to accept both traditional and Roth contributions allows participants to choose when they’ll receive a tax break — at the time they invest or when they take withdrawals.
With traditional pretax contributions, participants receive a break by investing money that hasn’t been taxed and deferring income taxes until withdrawal. Roth after-tax contributions, on the other hand, come from income that’s already been taxed. The Roth advantage is that qualified withdrawals, including earnings, are free from federal and most state income taxes.*
Here’s a comparison of traditional and Roth features.
|
Traditional pretax deferrals |
Roth after-tax deferrals |
|---|---|---|
Employee contributions |
Before-tax dollars |
After-tax dollars |
2024 employee contribution limits |
$23,000, or $30,500 for investors 50 and over.† Limits apply to all employee contributions combined, whether traditional, Roth or both. |
|
Employer matching contributions |
Not taxable until distribution. |
|
Distributions of employee contributions |
Taxable‡ |
Tax-free* |
Required minimum distributions (RMDs) |
RMDs must generally begin at age 73 or at retirement, whichever is later. Check your plan provisions. |
Effective for 2024 and later years, RMDs are no longer required from designated Roth accounts. |
IRA rollover options |
Can be rolled into traditional or Roth IRAs. Rollovers are not subject to the early withdrawal penalty, but Roth IRA rollovers are taxable. |
Can be rolled into Roth IRAs. |
For educational materials to help your employees learn more about Roth contributions, ask your financial professional. Employees can also find online information on our participant website.
* Withdrawals from Roth accounts are tax-free if the participant is at least 59½ years old, deceased or disabled; also, the Roth account must have been established at least five years before. For nonqualified distributions, earnings are taxable and may be subject to a 10% early withdrawal penalty.
† Plans may set lower limits. Some 403(b) plans may also allow “lifetime” catch-up contributions in addition to catch-up contributions for participants age 50 and over.
‡ Withdrawals made before age 59½ may be subject to a 10% early withdrawal penalty.
Participants age 50 and older are allowed to save even more than the standard annual maximum each year, an exception called a catch-up contribution because it gives older participants a chance to build up their nest eggs faster as they approach retirement.
Catch-up contributions can provide a number of benefits, including:
More savings. How much of a difference could catch-up contributions make over 15 years?
Contributions |
Value after 15 years |
|---|---|
$23,000 a year (2024 maximum) for 15 years |
$674,458.56 |
$23,000 a year plus $7,500 annual catch-up contributions (2024 maximum) for 15 years |
$894,390.64 |
This example is hypothetical and does not illustrate or predict the actual results of a particular investment. It assumes an 8% average annual rate of return compounded annually. Withdrawals may be subject to taxes and penalties. |
|
As you can see, making catch-up contributions of $7,500 a year in addition to the current maximum annual contribution could be worth an extra $219,932.13 after 15 years. And, because the limits may increase annually, maxing out both regular and catch-up contributions each year could add up to even more.
** Eligible 403(b) and 457(b) plans have additional catch-up contribution options
Starting on January 1, 2025, SECURE 2.0 requires DC plans that were created after December 29, 2022, to have automatic enrollment and deferral features. Automatically enrolling employees in your plan could dramatically raise your plan’s participation rate. If certain rules are met, it can also limit sponsor liability and reduce testing obligations.
Plan sponsors have an alternative to the expense of maintaining smaller accounts when employees leave. If a former employee has a total vested account balance between $1,000 and $7,000 in your plan, the money may be rolled over to an IRA without the employee’s consent. Accounts of $1,000 or less may be cashed out. Check your plan document to see if your plan allows for automatic rollovers.
Initiating automatic rollovers
To initiate automatic rollovers, the plan sponsor must enter into an agreement with the IRA provider who will receive the automatic rollover assets. This will allow IRAs to be established for terminated employees with a vested balance between $1,000 and $7,000.
Keeping small accounts
If you don’t mind keeping small account balances in your plan, you can amend your plan document in one of two ways:
Roth contributions are handled separately
When applying automatic rollover rules for purposes of determining the $1,000 threshold, the Roth portion of an account is treated separately. For example, if a terminated employee has a Roth 401(k) balance of $900 and a traditional 401(k) balance of $900, both portions could be cashed out because the balances aren’t combined.
When rollovers are required by a plan, the traditional portion of an employee’s account is rolled into a traditional IRA, and the Roth amount is rolled into a Roth IRA.
Please contact your Retirement Plan Coordinator to find out more about ways to customize your plan.