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Understanding the Roth 401(k)

Proprietary and Confidential

Disclaimer

This information is provided by Alight Financial Advisors, LLC (AFA) for

general informational purposes only and should not be considered an

individualized recommendation or personalized advice. The strategies

mentioned may not be suitable for everyone. Each investor needs to pursue a

particular investment strategy based on his or her own particular situation.

Data contained herein is obtained from what are considered reliable sources;

however, its accuracy, completeness, or reliability cannot be guaranteed.

The content of this presentation is for informational purposes only. This

information does not constitute investment advice or an offer to invest or to

provide management services. The information in this document does not

constitute tax advice. Please see your tax advisor to determine how this

information may apply to your own situation.


Learning Objectives

Understand the Roth and your 401(k)

Discuss the rules and provisions of the 401(k)

Explore the various reasons for choosing different

contribution types

Discover what tools and resources you have access to

Review three real life scenarios


401(k) Basics• Roth and Your 401(k)

• 401(k) Overview

• Contribution Types

• Contribution Rules

• Distribution Rules

• Roth 401(k) vs. Roth IRA


Roth and Your 401(k)

What is it?A different way to contribute

to the same retirement

account

How does it work?Contributions are taken out

of each paycheck on an

after-tax basis

How is it different?Roth contributions don’t

lower your taxable income

but distributions are tax-

free in retirement1

When did this first become

available?First created in 1997 by Senator

William Roth, it was introduced as

a way to attract younger people to

save for retirement2

Who is this for?Anyone may be able to

benefit from Roth

contributions

1Distributions are only tax-free if qualified2Source: Rothira.com


401(k) Overview

You choose how much

to contribute

1. You choose how to

contribute

2. You choose where

to invest

3.

401(k)

Before-Tax

Roth

After-Tax


Contribution Types

$18,500 if under age 50

$24,500 if age 50 and over

1Includes before-tax, Roth, and after-tax contributions, and employer matching contributions.

Total plan contribution limit:


$61,000 if age 50 and over1

Roth

Before-Tax

After-Tax

The IRS limits how much you can save in each

Employer matching contributions are available on

Before-tax and Roth only


Contribution Rules

1 Employer match is made on a before-tax basis2 LLNS 401(k) Retirement Plan has an employer match. LLNS 401(k) Savings Plan does not qualify for an employer match3 Total plan contribution includes before-tax, Roth, After-Tax and employer contributions.

Before-Tax 401(k) Roth 401(k) After-Tax

TaxesBefore-tax contributions

reduce taxable income

After-tax contributions do

not reduce taxable income

After-tax contributions do

not reduce taxable income

MatchingEligible for employer match1

Match is up to 6% contribution, depending on plan2

Limits

2018 IRS limits on

combined basis



2018 IRS limits on

combined basis



2018 total plan contribution

limit


$61,000 if age 50 and over3


Distribution Rules

1 Exceptions to this rule include separating in the year you turn 55 years old or later, certain disabilities and medical payments, payments made to beneficiaries,

and others. Please visit www.irs.gov and see tax topic 558 for more information2 For a distribution to be qualified in a Roth account, participant must be 59½ years old or older, and the first contribution must be at least 5 years old3 If rolling over from a before-tax 401(k) to a Roth IRA, this would be considered a conversion and can create major tax implications. Speak to a tax advisor

before considering this 4Only the after-tax contributions may be rollover over to a Roth IRA. Both after-tax contributions and tax-deferred earnings can be rolled over to a Traditional

IRA. See IRS Notice 2014-54 for more information

Before-Tax 401(k) Roth 401(k) After-Tax

DistributionsDistributions after age

59½ taxed as current

income

Qualified distributions are

tax-free2

Earnings are taxed when

withdrawn, and subject to

the 10% penalty if younger

than 59½

Penalties

Distributions prior to age

59½ subject to 10%

early withdrawal

penalty1 and taxes

Non-qualified

distributions face 10%

early withdrawal penalty

and taxes on earnings2

Distributions prior to age

59½ subject to 10% early

withdrawal penalty and

taxes on earnings1

TaxesEligible for rollover to a

traditional IRA or Roth

IRA3

Eligible for rollover to

Roth IRA

Eligible for rollover to both

Traditional IRA and Roth

IRA4

http://www.irs.gov/


Contribution Types Comparison

1For a distribution to be qualified in a Roth account, participant must be 59½ years old or older, and the first contribution must be at least 5 years old2Penalties may apply if under age 59½

Qualified

distributions tax-free1

Earnings portion

taxable

Distributions are

100% taxableBefore-Tax

Roth

After-Tax


Roth 401(k) vs. Roth IRA

What

Only in the Roth 401(k)

What

Only in the Roth IRA

Roth 401(k) Roth IRA

• Income limitations

• Lower contribution limits

• No Required Minimum

Distribution

• An IRA is an individual

retirement account, established

independent from one’s

employer

• A 401(k) is an employer-

sponsored retirement plan that

allows Roth contributions

• No income limitations

• Higher contribution limits

• Required Minimum

Distributions

Roth means you pay taxes now so you don’t have to later on!1

1Assuming the distributions are after the age of 59 ½ and the account is at least five years old


2018 Roth IRA Income Limitations

Single Filers

$120,000

$135,000

Phase Out

No

Contributions

Full

Contributions

Joint Filers

$189,000

$199,000

Phase Out

No

Contributions

Full

Contributions

You may not be able to contribute to a Roth IRA if your income is too high.

Modified Adjusted Gross Income (MAGI) is used for purposes of this rule


Roth FAQ’s

Will my beneficiaries owe taxes on inherited Roth balances?Your beneficiaries will generally retain the same tax benefits and will not owe

any taxes on inherited Roth balances.

Can I contribute to Roth and Before-tax at the same time?Yes! Just remember that the contribution limit is on a combined basis.

Can I borrow from the Roth 401(k)?Yes. Both general purpose loans and primary residence loans are available

from both Before-tax and Roth balances.

Can I invest the Roth balances differently from Before-tax?Your contributions will be invested on a pro-rata basis across your investment

elections.

Does my employer match my Roth contributions too?Yes! However, employer matching contributions are always made

on a before-tax basis.


Choosing a

Contribution Type• Common reasons

• Roth for estate planning

• Tools and Resources


Common Reasons

Before-TaxDo you need the tax break today? Do you believe

you will be in a lower tax bracket in the future? Do

you intend on rolling this money over to a Traditional

IRA in the future?

RothDo you prefer to pay taxes today at known tax rates?

Do you believe you will be in a higher tax bracket in

the future? Do you intend on rolling this money over

to a Roth IRA in the future?

After-TaxHave you met the IRS limits for your Before-tax and

Roth 401(k) contributions for the year and you want

to contribute more? Do you anticipate needing

access to the funds much sooner than retirement?


Historical Tax Rates

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

U.S. Income Tax Rates 1913-2017

Source: http://taxfoundation.org/sites/taxfoundation.org/files/docs/fed_individual_rate_history_nominal.pdf

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Roth For Estate Planning and the RMD

At age 70 ½ the IRS requires retirees to take RMD’s

Failure to take the RMD can result in a 50% excise tax

Applies to Before-tax 401(k), Roth 401(k), Traditional IRA

RMD amount is based on the account balance

Roth IRA’s are NOT subject to RMD’s

Roth 401(k)’s can be rolled over to a Roth IRA

Assets can transfer to beneficiaries tax-free


Roth IRA For Estate Planning – Example

$100,000 $89,000 $114,000

$100,000 $0 $240,000

Account Balance

at age 70 ½

Total RMD

Payments

Account Balance

at age 85

Non-Roth IRA

Roth IRA

Avoiding RMD’s can mean significantly more wealth

transferred to your beneficiaries when you pass away

Example uses the 2017 Uniform Lifetime Table from the IRS. Assumes investment growth of 6% annually.

Effects of inflation or possible changes in the tax code have not been considered.


People Like Me• Lucy

• Mark

• Tom


People Like Me – Lucy

Lucy is just out of college

Lucy has just started her first full-time job

and earns $40,000 per year

Her expenses are very low so she can

save 10% of her income for retirement

Believes her tax rate will only go up

By making Roth contributions, she will

pay taxes at her current low rate


People Like Me – Mark

Mark is in the middle of his career

Mark is married with three kids, and

earns $80,000 per year

Mark enjoys many tax benefits from

having so many dependents

Mark’s expenses are quite high

Believes he will be in a higher tax bracket

in retirement

Makes Roth contributions in order to pay

taxes in what he believes is his lowest

tax rate


People Like Me – Tom

Tom retires in 10 years

Tom is 55 and makes $125,000 per year

Wants to save enough to get the full

employer match

Believes his tax rate will go down in

retirement

Acknowledges he has no idea what tax

rates will be in the future

Tom makes both Roth and Before-tax

contributions


Next Steps

Review current contributions

Consider future circumstances

Explore tools and resources

Discuss with tax advisor or financial

planner

Make changes on benefits center

website at any time


Course Summary

401(k) Basics

Choosing a Contribution Type

People Like Me

• Roth and Your 401(k)

• 401(k) overview

• Contribution Types

• Contribution rules

• Distribution rules

• Contribution comparison

• Common reasons

• Historical tax rates

• Roth as an estate planning vehicle

• Lucy, Mark and Tom


For More Information

LLNL Benefits Office

X 2-9955

Building 543, Room 1216

https://benefits.llnl.gov

https://benefits.llnl.gov/


Workshop Evaluation

Your feedback is greatly appreciated!


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