– Provided you are over 59 1/2 (with some exceptions) and have held the Roth 401(k) for five years, distributions of contributions and any income or gains that have accrued in the Roth 401(k) are entirely tax-free as opposed to traditional 401(k) distributions that are generally taxable as ordinary income.
– You can avoid required minimum distributions (RMDs) on the Roth 401(k) by a rollover to a Roth IRA. Otherwise, like a traditional 401(k) or IRA, your RMD obligation will generally begin at 70 ½.
– If your employer offers a Roth 401(k) and a traditional 401(k), you can make contributions to both plans as long as the combined amount does not exceed the Internal Revenue Service contribution limit of $17,500 in 2014 ($23,000 for people 50 or older).
Cons of switching to a Roth 401(k):
– Contributions to a Roth 401(k) are made with after-tax money; there is no deduction from your gross income as there is with a contribution to a traditional 401(k).
– You must pay income tax on the amount of the traditional 401(k) that you convert to the Roth 401(k). If you use the traditional 401(k) as a source to pay the tax, you will be taxed on the funds you use to pay the tax.
– You should know that if your employer matches your Roth 401(k) contributions, the match will go into a separate pre-tax account, not your Roth 401(k) account, and on distribution the matching funds will be taxed.
Whether or not the pros outweigh the cons depends on a number of factors including your current tax situation and your outlook on how that may change in retirement. Before you make any decision to switch to a Roth 401(k), you should review the plan documents and then consult your financial planner and tax professional.