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What are Roth contributions?

You may be familiar with traditional, tax-sheltered deferrals for retirement accounts that are tax-deductible, but are you familiar with Roth Contributions as another helpful tool for your tax strategy?

Roth contributions are included in taxable income in the year earned but go a step further than simple, after-tax contributions by providing the attractive feature of qualified withdrawals. (This type of withdrawal allows earnings to be completely tax-free during retirement — more on this later!)

Because most of our retirement plans at GuideStone® allow you the option of making Roth contributions, we want to cover some of the important things you should consider to determine if Roth contributions are right for you.

How do Roth contributions work?

Treated like regular income, Roth contributions are subject to federal income tax withholding during the year earned and set aside into your retirement account as savings. This means you are choosing for Roth contribution income to be taxed upfront rather than taxed later as income during your retirement years. Assuming your tax bracket may be higher in retirement, choosing immediate taxation on lower overall income in early years can be a huge win in tax savings!

Plus, the earnings on Roth contributions may grow tax-free overtime as long as they satisfy the requirements of a qualified withdrawal.

What is a qualified withdrawal?

When you are ready to begin receiving retirement income, your account will be comprised of your original contributions as well as your earnings from overall investments. Your distributions on Roth-designated dollars will be tax-free for federal income tax purposes (state tax rules vary by state) provided they meet the following criteria:

  1. The funds must be held for a 5-year period, dating from the earlier of:
    • The first year that you contribute to any Roth 403(b) or 401(k) account in your employer’s plan or
    • If a Roth rollover contribution is made, the first taxable year you made a designated Roth contribution to the other applicable retirement plan.

  2. AND

  3. The distribution must be made after one of the following events:
    • Age 59½
    • Disability
    • Death, with the distribution made to your beneficiary.

It is important to note that there are exceptions for Roth IRAs regarding qualified withdrawals. GuideStone recommends that you speak with a registered representative about your specific situation.

What is the difference between an employer-sponsored plan that supports Roth contributions and a Roth IRA?

While both accounts accept Roth contributions, you will want to consider their differences and choose the best one for your circumstances.

Use this chart to better understand the differences between an employer-sponsored plan that supports Roth contributions and a Roth IRA.

Feature Employer-sponsored plan* that supports Roth contributions

*401(k), 403(b), etc.
Roth IRA
Contributions Designated Roth employee elective contributions are made with after-tax dollars. Roth IRA contributions are made with after-tax dollars.
Income limits No income limitation to participate. Income limitations
Maximum elective contributions Annual Contribution Limits Annual IRA Contribution Limits
Taxation of withdrawals Withdrawals of contributions and earnings are not taxed provided it’s a qualified distribution — the account is held for at least 5 years and made:
  • On account of disability,
  • On or after death, or
  • On or after attainment of age 59½.
Same as Designated Roth 401(k) Account and can have a qualified distribution for a first-time home purchase.
Required minimum distributions Distributions must begin no later than age 72, unless still working and not a 5% owner of a business. No requirement to start taking distributions while owner is alive.

Quick Recap:

  • Roth contributions may help you save money on taxes later.
  • Roth earnings must satisfy qualified withdrawal requirements to be completely tax-free.
  • Understand the differences between Roth contributions to an employer-sponsored plan and to a Roth IRA before making a decision.

For more information, you may contact a customer solutions specialist by calling 1-888-98-GUIDE (1-888-984-8433), Monday through Friday, from 7 a.m. to 6 p.m. CT.