Hello and thank you for joining today's webinar, where we will be discussing your retirement plan option that provides an opportunity for tax-free growth of your investments called the Roth 401(k). We'll begin by breaking things down into five sections today.

In the first section, we're going to cover a change in contribution limits that is new for 2026. In section two, we'll get into what a Roth 401(k) is, and then talk about the benefits and features, followed by things to consider when deciding whether to take advantage of the Roth option.

And lastly, we'll wrap up the presentation with a brief summary. In 2022, Congress passed the SECURE 2.0 Act, which included a significant change regarding catch-up contributions for highly compensated individuals in 401(k) plans.

Each year the IRS sets limits on the maximum contributions participants can make to their 401(k). Historically, there has been an additional contribution for participants over 50 called catch-up contributions, and those catch-up contributions have a new wrinkle for 2026.

While 401(k) catch-up contributions will continue to be allowed for individuals over 50, the SECURE 2.0 Act did make a distinction impacting the catch-up allotments for highly compensated employees. Prior to this year, all participants over 50 could make catch-up contributions using their choice of pre-tax or Roth deferrals. Starting new in January 2026, employees who earn more than $150,000 a year than the previous year from their employer sponsoring the plan will have the catch-up contributions applied via only the Roth contribution source.

Again, 2026, for highly compensated individuals, those catch-up contributions will need to make be made via the Roth. So, now let's get into more detail regarding the Roth 401(k) option.

You maybe familiar with the traditional 401(k) where contributions can be made on a pre-tax basis and where taxes on contributions are deferred until they're withdrawn. The Roth 401(k) was created in 2006, and it's a retirement savings plan option that allows its participants to contribute on an after-tax basis. Participants making contributions to a traditional 401(k) on a pre-tax in basis reduce their current taxable income, and the taxes that participants would be paying are invested and compounded over time and those taxes are then paid when the distributions are taken, typically in retirement. In the Roth, contributions are made on an after-tax basis, so they don't reduce your current taxable income, but no taxes will be owed on qualified distributions, including those on any earnings. So the advantage for the Roth is in the retirement phase. When you take those distributions, those distributions are tax-free in the traditional phase, you have the benefit of the current tax benefit. So what is the qualified distribution? Well, in order for a Roth distribution to be qualified, you must be aged 59 and a half or older, and the account must be open for five taxable calendar years.

If you satisfy both criteria, the money can come out tax-free, and that's including any of the earnings on your investments. In the Roth 401(k), contributions are made on after-tax basis.

So, unlike pre-tax contribution, they do not reduce your current taxable income. The contribution limits set by the IRS each year apply to both traditional and Roth 401(k)s. On this chart, you see the limits for 2026, but the IRS typically adjusts those annually.

Participants can contribute up to the entire limit on a pre-tax 401(k) account, a Roth 401(k) account, or split between both. The IRS limits for employee contributions apply to the total of your contributions and all of your accounts combined. For catch-up contributions, participants can contribute more after the age of 50. In 2026, those participants will be able to contribute an additional $8,000, and the SECURE 2.0 Act also created an additional level of catch-up for those participants aged 60 to 63. As I mentioned earlier, highly compensated individuals will need to make catch-up contributions using the Roth option. For employer company contributions, the same rules apply for contributions investing in the Roth as they do for the traditional 401(k) plan. As previously noted, all contributions and earnings in a traditional pre-tax 401(k) are taxed at the time of distribution, but with the Roth, as long as the distributions are qualified, the contributions and earnings are not taxed. For traditional pre-tax balances, the IRS will require you to make minimum distributions starting at age 73. There are no required minimum distributions for the Roth because you've already paid those taxes.

Balances from a traditional 401(k) can be rolled into another traditional 401(k) or a traditional IRA. Rollovers from a Roth 401(k) can roll to another Roth 401(k) or Roth IRA.

Now, let's look at some of the benefits and features of the Roth. As mentioned earlier, the Roth allows balances for tax-free distributions on earnings and your contributions to the plan. Alternating distributions from pre-tax sources and tax-free sources like the Roth allow you to make tax diversification strategies in your retirement. Since the Roth investments are not tax deferred, there are no required minimum distributions. It's very beneficial in regard to estate planning because your beneficiaries of the Roth receive tax-free assets from your estate.

Unlike Roth IRAs, there are no income limits on the Roth 401(k) contributions, as well. Some things to be aware of when making Roth contributions: Money cannot move from a Roth into a traditional 401(k) account, but you can change the amount you're deferring to either option as often as the plan allows. In-plan Roth Conversions, which is an option that moves assets from traditional into Roth portions may be available in some plans, and you should consult with a tax advisor before making that decision as it would create a taxable event.

Any of your contributions into Roth as with the traditional, are fully vested immediately and they cannot be forfeited back into the plan. For any eligible employer company contributions, the same rules apply for contributions investing in the Roth as they do in the traditional pre-tax plan. So, let's look at an example of a qualified distribution from a Roth 401(k) account.

Bob is 58 and made his first Roth contribution on July 1st of 2022. Therefore, he's eligible to receive his first qualified distribution on January1st of 2027.

The distribution satisfies the five year and age 59 and a half requirements because he was at least 62 years old when the money was withdrawn, and the five years began with his first contribution. Should circumstances result in you taking a non-qualified distribution, the result would be a 10% penalty as well as the earnings portion of your withdrawal being subject to income taxes. The goal as always is to take those qualified distributions in retirement. As I mentioned earlier, any Roth balances being rolled over must be rolled into a Roth 401(k) or Roth IRA.

Please note that when rolling from a Roth 401(k) into a Roth IRA, the Roth IRA must have been open for five years for the distributions to be considered qualified, as well. Now, let's talk about some other things to consider when choosing a Roth 401(k).

What will be the tax status of your assets in retirement? Future taxes are always difficult to predict, but if you expect higher taxes in retirement, then the Roth 401(k) might be right for you. If you need the tax benefit now or expect taxes to be lower in retirement, you might want to consider the pre-tax option for your, for your investments. You can choose traditional Roth or a mix of both within the IRS contributions limits each year allowing you for tax diversification. If you're considering switching some or all of your pre-tax deductions into the Roth 401(k) option, please note, it could impact your take home pay and possibly change your income tax bracket. Because the Roth 401(k) contributions are after-tax, they could reduce the net amount of your paycheck. If you're making significant changes to your contributions, be sure to consult a tax advisor.

Now let's take some time to sum it all up. If the Roth 401(k) is available in your plan, you can contribute to pre-tax, Roth, or both sources up to the current year IRS limits. With the Roth you can also avoid minimum distribution requirements.

And to receive any qualified distribution, the account has to be open for five taxable calendar years, beginning with the first contribution and would also need to occur after the age of 59 and a half. If tax-free withdrawals could potentially benefit you and your employer does make a Roth 401(k) available, you might want to consider adding the Roth 401(k) to your retirement planning notes. That concludes our presentation for today. Thank you for taking the time to learn about the Roth 401(k) option. Hope this has been a valuable lesson for you.