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When it comes to making retirement account contributions, it makes sense to carefully consider your options, and weigh your choices.

In many cases, workers try to make a decision between a 401k and an IRA — or at least try to figure out which should be funded first ^[3]. A 401k  has a higher contribution limit, but the IRA often has more flexibility, and many people also like the Roth option that comes with an IRA.

What is not more widely known, though, is that a Roth option has been available for the 401k for a few years. You can choose to invest in a Roth 401k, and if you already have a regular 401k, you can also roll over your contributions to a the Roth version.

What is the Roth 401k?

The Roth 401k ^[4] was rolled out in 2006. The Roth 401k combines aspects of the 401k with a Roth account. The contributions you make are after-tax, meaning that you pay your taxes before contributing. You don’t receive a tax benefit now. Instead, your money grows tax-free; your tax benefit comes later when you withdraw without owing taxes.

The contribution limits are the same for a Roth 401k as for a Traditional 401k. On top of that, there are no income restrictions, so anyone can contribute to a Roth 401k. However, unlike the Roth IRA, once you contribute the money, it’s in the account permanently, and you need to wait until age 59.5 before you can take distributions. You can’t even withdraw your contributions early. Additionally, like the Traditional 401k (and the Traditional IRA), the Roth 401k has required minimum distributions ^[5] at age 70.5.

Many employers still don’t offer a Roth 401k. If you want access to one, you will need talke to your human resources department.

What about Rollovers to a Roth 401k?

It’s possible for you to roll your Traditional 401k into a Roth version — if your employer allows for this move. In order to take advantage of the rollover, there has to be an in-plan conversion offered by your employer. It’s also important to note two very important things:

1. You have to pay taxes: Since the money you are rolling over hasn’t been taxed yet, you have to pay taxes on the amount you convert. You need to make sure you can handle the tax bill when you roll over the amount. You can choose to roll over your account a little at a time over a period of years, to make the taxes more manageable.
2. A Roth 401k rollover is irrevocable: When you roll your assets over to a Roth IRA, you can “re-characterize” the move, essentially taking it back. This can help if your account value falls in value and you want to recapture some of the taxes you paid. With the Roth 401k rollover, though, you can’t take it back. The change is permanent.

Before you decide to do a rollover to a Roth 401k, make sure it makes sense in your situation. Consider the tax consequences now, and compare them with what you will really save later.

(Photo: La’J ^[6])