401(k) Tips

How do I know if my 401k is a Roth?

If you want to know the type of 401(k) account you have, here are the various methods you can use to know whether you have a Roth 401(k) or a traditional 401(k).

3 min read

If you have a 401(k), you could be wondering how you can know the specific type of 401(k) you have- whether it is a Roth 401(k) or a traditional 401(k). Although these retirement accounts have certain similarities, they also differ in how they tax contributions and distributions. A traditional 401(k) is funded with pre-tax dollars, and you only pay taxes when you take a distribution. In contrast, a Roth 401(k) is funded with after-tax dollars, and the distributions are not taxed.

If you want to know the type of 401(k) you have, you should check box 12 of your W-2 tax return form. Roth 401(k) contributions are recorded as Code AA in Box 12 of the W-2 form, whereas 401(k) elective deferrals are recorded in W-2 Box 12 as Code D. You can also know whether you have a Roth 401(k) by checking the retirement paperwork you received when opening the retirement account. These documents should include information on whether you have a traditional 401(k) or Roth 401(k) account.

How to Know If Your 401(k) is a Roth

Check W-2 Form

If you received Form W-2 from your employer, it could provide information on the type of 401(k) contributions. You should check Form W-2 Box 12 to know the amount contributed to the 401(k) and the code that is written against the contribution amount. If you have a Roth 401(k), it should be indicated Code AA and the amount contributed. However, if the record indicates Code D and the amount contributed, it is a traditional 401(k) account.

Check 401(k) paperwork

If you have a collection of all your 401(k) paperwork, they should shed light on the type of 401(k) you have. Check the paperwork you received when you opened the 401(k) account to know if you have a Roth 401(k). You can also check other 401(k) plan mails to see if they provide information on the type of 401(k) you have.

Ask the 401(k) plan sponsor

If you still can’t find information on your 401(k) account, you should ask the plan sponsor. You can call or email them for a quick response, and you should be ready to provide identifying information such as your social security number or employee number to prove your identity.

What is W-2 Tax-Form?

W-2 is a tax form that employers are required to send each year to employees who earned a wage, salary, or other forms of compensation. This tax form reports the employee's annual wages, taxes withheld, retirement contributions, social security, etc. The employer must send this tax form on or before January 31 each year, and the employee must then file their annual tax return by April 15 of the year or the extended tax deadline.

What is a 401(k)?

A 401(k) is an employer-sponsored retirement plan that allows employees to contribute a portion of their paycheck as retirement savings. It is a tax-deferred account, and this means that 401(k) participants do not pay taxes when they contribute money to the retirement account. Instead, the retirement savings grow tax-free until the employee takes a distribution in retirement.

A 401(k) allows higher contribution limits than an IRA, and you can contribute up to $19, 500 in 2021, or $26,000 if you are above age 50. If the employer offers a match, the total 401(k) contributions can go up to $58,000 in 2021, or $64,500 if you are age 50 or older. The 401(k) contributions are then invested in different types of investment options such as stocks, exchange-traded funds, and mutual funds that are preselected by the 401(k) plan. Any gains earned on these investments are not taxed when earned, but they will be taxed when the funds are withdrawn.

What is a Roth 401(k)?

A Roth 401(k) account is a hybrid retirement savings account that integrates the features of a traditional 401(k) and Roth IRA. It allows retirement savers to make after-tax contributions to their retirement account up to the IRS contribution limit. Taxes are taken out when making contributions, and therefore, you won’t pay any taxes when you take a distribution in retirement. If you think you will have a higher income in retirement, hence a higher tax bracket, you can opt to pay taxes now so that you can take tax-free distributions in the future.

A Roth 401(k) has similar contribution limits as a traditional 401(k). You can contribute up to the IRS limit of $19,500 per year in 2021 or $26,000 for individuals who are 50 or older. You can also take advantage of the company match to increase your annual contributions to $58,000 in 2021, or $64,500 if you are age 50 or older. When you withdraw your retirement savings, you won't pay any taxes on the distribution as long as it is a qualified withdrawal. One of the requirements for a qualified withdrawal is that the Roth 401(k) account must have been active for 5 years or more. Also, a tax-free withdrawal can be made on the account of disability, death of the account holder, or if you have reached age 59 ½. 

Similarities between a Traditional 401(k) and a Roth 401(k)

There are certain characteristics that a 401(k) and a Roth 401(k) share in common. First, both retirement accounts are employer-sponsored, and employees enjoy the convenience of having retirement contributions automatically deducted from their paycheck and deposited into the retirement account.

If the employer’s company offers a match, you should collect the free match using your traditional 401(k) account or Roth 401(k) account. A majority of employers offer 401(k) match of up to 50% of the employee's contribution up to a maximum of 6% of the employee's salary. With the free money, you can increase your contributions above the employee contribution limit, and have more money to invest in the available investment options.

401(k) vs. Roth 401(k): How Do They Differ?

The key difference between a 401(k) and a Roth 401(k) is the tax treatment of contributions and distributions.

A 401(k) is a type of retirement savings account that is funded with pretax dollars. When you contribute to a 401(k) account, the contribution is deducted from the employee's taxable income. When you take a distribution from a traditional 401(k) account, the amount withdrawn will be subject to income taxes. For example, if you have accumulated $1 million in your 401(k), and you are in the 32% tax bracket, it means you will pay $320,000 in income taxes to the IRS.

In comparison, a Roth 401(k) is a post-tax retirement account that is funded with post-tax dollars. This means that the taxes are already taken out, and you remain with reduced pay. Since you paid income taxes when contributing to the Roth 401(k) account, you won’t pay any taxes if you withdraw money in retirement. However, if your employer contributed a match to your retirement account, you will be required to pay taxes on the employer’s match. For example, assume that you have $1 million in your Roth 401(k), out of which $100,000 represents the employer’s match. When you take a distribution, you won’t owe any income taxes on the $900,000 you contributed from your paycheck. However, if you are in the 22% tax bracket, you will owe $22,000 in taxes on the employer’s match.