Using Roth401k For Wedding Expenses: A Smart Financial Move?

A Roth 401(k) is a type of retirement plan that allows individuals to make tax-free withdrawals in retirement. While it is a popular option, there are some restrictions on who can contribute to a Roth 401(k) and how much can be contributed. In this article, we will explore the topic of using a Roth 401(k) for wedding expenses, including the eligibility requirements, contribution limits, and potential tax implications. We will also discuss alternative options for couples who may not be eligible for a Roth 401(k) and provide a comprehensive overview of the pros and cons of utilizing this retirement savings vehicle.

Roth 401(k) vs Roth IRA

While both Roth 401(k)s and Roth IRAs are funded with after-tax dollars, there are some key differences between the two. Here is a direct comparison of the two types of retirement accounts:

No Income Limits with a Roth 401(k)

Anyone can contribute to a Roth 401(k) regardless of their income level, as long as their employer offers this option. In contrast, only individuals earning below a certain amount can contribute the full amount to a Roth IRA. For example, in 2024, single filers earning $161,000 or more and joint filers earning $240,000 or more are not eligible to contribute to a Roth IRA.

Higher Contribution Limits with a Roth 401(k)

The contribution limit for Roth 401(k)s is much higher than that of Roth IRAs. In 2024, you can contribute up to $23,000 per year to a Roth 401(k), with a catch-up contribution of $7,500 if you're 50 or older. On the other hand, the annual contribution limit for a Roth IRA is $7,000 per year, or $8,000 if you're 50 or older.

Matching Contributions with a Roth 401(k)

Roth 401(k)s are eligible for matching contributions from employers, whereas Roth IRAs are personal accounts that do not have this option. Many companies offer 401(k) matching contributions, which can boost your savings even further.

More Investment Options with a Roth IRA

Roth IRAs typically offer a wider range of investment options than Roth 401(k)s. With a Roth IRA, you can choose a broker that offers the specific investments you want. In contrast, Roth 401(k)s are limited to the investments offered by your company's plan.

More Flexible Distribution Rules with a Roth IRA

Roth IRAs have more flexible distribution rules than Roth 401(k)s. With a Roth IRA, you can withdraw your contributions tax-free and penalty-free at any time. With a Roth 401(k), you can only withdraw funds once you've reached age 59 1/2 and it's been at least five years since your first deposit.

RMDs No Longer Apply to Either Account Type

Previously, required minimum distributions (RMDs) applied to Roth 401(k)s but not to Roth IRAs. However, for tax years 2024 and later, RMDs no longer apply to either account type. This change was brought about by the SECURE Act 2.0.

Income limits for Roth IRAs

While there are no income limitations to participate in a Roth 401(k), there are income limits for opening a Roth IRA. These limits are set by the IRS and are based on your Modified Adjusted Gross Income (MAGI). The income limits for contributing to a Roth IRA are different for single and joint filers.

For the 2023 tax year, single filers with a MAGI of under $153,000 and joint filers with a MAGI of under $228,000 can contribute the full amount to a Roth IRA. For the 2024 tax year, these limits increase to $161,000 for single filers and $240,000 for joint filers. It's important to note that the contribution limits also vary based on your age. For those under 50, the contribution limit is $7,000 for 2024, while for those 50 and older, the limit is $8,000.

If your income exceeds these limits, you may still be able to make reduced contributions to a Roth IRA. For single filers with a MAGI between $150,000 and $165,000, and joint filers with a MAGI between $236,000 and $246,000, the contribution limit is reduced. However, if your income is above $165,000 as a single filer or $246,000 as a joint filer, you cannot contribute to a Roth IRA at all.

It's important to stay informed about the income limits and contribution limits, as they may change from year to year due to IRS inflation adjustments. Additionally, it's worth noting that the income limits do not apply to traditional IRAs, and you can always contribute to a traditional IRA if you exceed the income limits for a Roth IRA.

Pros and cons of a Roth 401(k)

While a Roth 401(k) can be a powerful way to save for retirement, there are several pros and cons to consider before opening one.

Pros

• Higher contribution limit than IRA: The contribution limit for a Roth 401(k) is higher than that of a traditional IRA. For 2024, the limit for a Roth 401(k) is $23,000, compared to $7,000 for an IRA.
• No taxable income reduction: With a Roth 401(k), you contribute after-tax dollars, so there is no reduction in taxable income.
• Tax-free withdrawals: Since you've already paid taxes on the money in your Roth 401(k), you can withdraw it and any earnings tax-free when you retire.
• Rollover funds to Roth IRA with no tax implications: You can roll over funds from a Roth 401(k) to a Roth IRA without any tax consequences.
• No income limit to participate: Unlike a Roth IRA, there is no income limit to participate in a Roth 401(k). However, employees who earn $155,000 or more in 2024 may be classified as highly compensated employees (HCEs) and have their contribution amounts limited.
• High contribution limits with no income restrictions: Roth 401(k)s do not have income restrictions, unlike Roth IRAs, which are limited to those with modified adjusted gross incomes (MAGIs) below certain thresholds.
• Help with RMD concerns: Starting in 2024, Roth 401(k)s are no longer subject to required minimum distributions (RMDs). This gives you more flexibility in retirement and allows you to potentially avoid taxes on Social Security benefits and Medicare surcharges.

Cons

• Fewer investment choices: Traditional and Roth 401(k) plans typically offer fewer investment options than other types of investment accounts.
• No tax deferral now: With a Roth 401(k), you don't get a tax break on contributions in the current tax year, which may result in higher taxes now.
• Cannot withdraw funds early without penalty: You must wait at least five years after your first contribution to withdraw funds from a Roth 401(k) without paying a penalty.
• High fees: 401(k) plans, including Roth 401(k)s, typically charge high fees, which can eat into your investment returns.

How to open a Roth IRA with a spouse

While it is not possible to open a joint Roth IRA with your spouse, there are other spousal retirement saving options. One option is to open an individual Roth IRA each. Another option is to open a spousal IRA, which is a retirement savings strategy that allows a working spouse to contribute to an IRA in the name of a non-working spouse.

To open a spousal IRA, you must be married and file your taxes jointly. The working spouse must have enough taxable earned income to cover both contributions. The total contributions cannot exceed the annual IRA contribution limit.

If you are looking to open a Roth IRA, you can do so through a financial services custodian, such as Fidelity. You will need to provide certain information, such as your name, date of birth, and Social Security number. You can also decide whether to make the maximum allowed contribution for the year or set up ongoing monthly automatic contributions.

It is important to note that income limits apply to Roth IRAs. For 2024, individual tax filers earning less than $146,000 and joint filers earning less than $230,000 can each contribute the full $7,000 per year, plus an extra $1,000 if they are 50 or older. If you earn more than these amounts, the contribution amount will be reduced, and once single filers earn $161,000 or more and joint filers earn $240,000 or more, they cannot contribute to a Roth IRA at all.

Eligibility rules for married couples

When it comes to retirement accounts, the federal government requires that each person has their own individual account, rather than a joint family account. In the case of a 401(k) plan, the account belongs to the person who works for the employer offering the plan. So, if each spouse has a job with an employer that offers a 401(k), then each one can participate. However, the two spouses have to decide how much each will contribute.

For Roth IRAs, there's a maximum income limit. For married couples with an adjusted gross income of more than $194,000, no Roth IRA contribution is allowed. Between $184,000 and $194,000, a partial contribution is permissible. Below that, the full contribution is allowed, which is $5,500 for those under 50 or $6,500 for those 50 or older.

For 2024, the income limit for married couples filing jointly is $240,000, above which no contributions are allowed. Between $230,000 and $240,000, partial contributions are allowed. If you are married and file jointly, your limit may be limited by your spouse's income if you have no income yourself and are contributing to a spousal IRA.

It's important to note that there's no income limit on deducting contributions to a traditional 401(k) account. That means high earners may be better off contributing to the traditional 401(k) and taking the tax deduction now at their high marginal tax rate than saving in a Roth account.

Frequently asked questions