Roth 401(K)

What Is a Roth 401(k)?
The arena of employer-sponsored retirement plans has been dominated by 401(k) plans that are funded with pre-tax contributions, which effectively defers taxes until distributions begin. However, Roth 401(k) is funded with after-tax money just like a Roth IRA, allowing retirees to enjoy qualified tax-free distributions once they reach age 59½ and have met the five-year holding requirement.

It might be smart to invest in a Roth 401(k) if you believe that you will be in a higher tax bracket during retirement. This is always a possibility, especially if you end up with fewer tax deductions during your post-working years. On the other hand, if you expect to be in a lower tax bracket during retirement, then deferring taxes by investing in a traditional 401(k) may be the answer for you. If you have not been able to contribute to a Roth IRA because of the income restrictions, you will be happy to know that there are no income limits with a Roth 401(k).

Employers may match employee contributions to a Roth 401(k) plan, but any matching contributions must go into a traditional 401(k) account. That is, employer contributions and any earnings are always made on a pre-tax basis, and are taxable when distributed from the plan.

If an employer offers a Roth 401(k) plan, employees have the option of contributing to either the regular (pre-tax) or the Roth account, or even both at the same time. If you do not know which type of account would be better for your financial situation, you might split your contributions between the two types of plans. It’s important to note that in 2019, your combined annual contributions to a 401(k) plan cannot exceed $19,000 if you are under age 50, or $25,000 if you are 50 or older. These amounts are indexed annually for inflation.

If your employer offers a Roth 401(k) plan and allows in-plan Roth conversions, you can make transfers to a Roth 401(k) account at any time. Conversion is a taxable event. Funds converted are taxed as ordinary income in the year of the conversion.

Upon separation of service, you can roll over your Roth 401(k) assets to another Roth 401(k), a Roth 403(b), or a Roth IRA. Assets cannot be rolled over to a traditional 401(k) account. If you transition from an employer that offers a Roth 401(k) account to an employer that does not, your only option would be to roll the assets directly to a Roth IRA or to leave your money in your former employer’s plan (if allowed).

The required minimum distribution guidelines of a Roth 401(k) work like those of traditional 401(k) plans. You must generally begin taking distributions after reaching age 70½, either as a lump sum or on a required minimum distribution schedule based on your life expectancy. However, unlike traditional 401(k) withdrawals, Roth distributions would be free of federal income taxes.

If you see the advantages of having tax-free income in retirement, then you might consider a Roth 401(k). It allows you to contribute more annually than you could to an IRA, and the tax-free distributions won’t add to your income tax liability. Of course, before taking any specific action, you might want to consult with your tax professional.

The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the ­purpose of ­avoiding any ­federal tax penalties. You are encouraged to seek advice from an independent professional ­advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the ­purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2019 Broadridge Investor Communication Solutions, Inc.

Choosing the Correct Survivor Annuity

Retirement and life insurance aren’t commonly thought of together, yet that is exactly what the survivor annuity is. The FERS survivor annuity (SA) is an option that FERS employees can elect on their retirement paperwork.

Why is a survivor annuity like life insurance?

The main purpose for a survivor annuity is for married FERS employees to have the option to leave an income stream to their surviving spouse. In other words, you can leave a benefit at your death (sound familiar?). The reason for the SA is quite simple – many spouses can’t afford to lose an income of $2,000 a month (I will repeatedly use the example of a $2,000 monthly FERS annuity in this article).

This is a VERY important subject (albeit not the most pleasant to discuss) and an important conversation to have.

There are actually three options on your retirement paperwork regarding your SA choice.

  • No survivor
  • Partial survivor
  • Full survivor

No survivor annuity

If you don’t choose a survivor annuity, your paperwork has to be signed and notarized by your spouse. The only thing your spouse would receive under this option is a refund of any unused FERS deposits (The total of the 0.8% you paid in minus the total of FERS benefits received). If you don’t choose a SA then your spouse cannot continue Federal Employee Health Benefits (FEHB) after your death.

Partial Survivor Annuity

The partial SA will reduce your annuity by 5% in return for a spousal benefit of 25% at your death. Using our example of a $2,000 annuity, the federal retiree’s FERS annuity would be $1,900 a month and guarantee that their spouse will receive $500 a month (if the spouse is still living after the federal employee’s death).

Your spouse’s signature and notarization are required for the partial annuity as well.

The partial SA does allow your spouse to continue FEHB after your death.

Full Survivor Annuity

The full SA will reduce your annuity by 10% in return for a spousal benefit of 50% at your death. Going back the example of $2,000, your FERS annuity would be $1,800 a month and your surviving spouse would receive $1,000 a month after your death.

A great deal of talk about death and dying here, but what happens if the federal employee outlives the spouse? First, the federal employee needs to notify OPM of the spouse’s death in order to get your annuity changed back to 100%.

You will not get the 5%, or 10% back that you paid in for the survivor annuity. Any past reduction in your FERS annuity will be lost.

COLA on the survivor annuity

Another important aspect of the survivor annuity is that there is a default COLA associated with it. Since FERS annuitants over age 62 receive a COLA on their annuity, that means that the survivor annuity will increase along with that COLA. As the FERS annuity increases, so does the survivor benefit.

This is both good and bad – yes, the survivor annuity will increase each time you receive a COLA but so does the cost. For example, a full survivor annuity costs a retiree 10% of their FERS annuity and 10% of $2,500 is less than 10% of $3,000.

Is life insurance a good replacement for the survivor annuity?

As is the case with many financial questions, it depends on a few factors.

The first question to answer is whether or not your spouse depends on your health insurance. I would guesstimate that this is the case with 90% of federal employees, and if so then you must elect a survivor annuity. In this scenario, the most you could do is look at getting life insurance to cover over and above the partial SA.

Something else to consider is taxes. The cost of the survivor annuity is not taxed, but the premiums for life insurance are made in after tax dollars. The opposite is true of the benefits of each. Survivor annuities are taxable income and life insurance proceeds are income tax free.

The age and health of each spouse needs to be considered as well. If your spouse is 10 years older and in bad health, life insurance may be a good fit versus the SA. If you are 10 years older than your spouse, then the SA sounds like a good deal because your insurance costs may be high and your spouse will likely outlive you and benefit from the guaranteed SA.

Is leaving money to your kids a priority? If so, then life insurance could be a good fit since it will pay out at your death regardless of who outlives who. This is not the case with the survivor annuity. The survivor annuity is only around for a maximum of your lifetime and your spouse’s lifetime.

If you are single at retirement and get married later, there are options for adding your spouse to your benefits and electing a SA for your new spouse. You must notify OPM and they will help you through the details.

Important decision

The survivor annuity is no different than any other retirement decision – it is going to take a little thought and analysis to make the best decision for you and your family. Survivor annuity elections are one point of analysis in our financial plans with federal employees. If you would like to discuss putting together your own plan you are welcome to set up an introductory call.

Retirement Plan Limits

How much money can I put into my IRA or employer-sponsored retirement plan?

IRAs and employer-sponsored retirement plans are subject to annual contribution limits set by the federal government. The limits are adjusted periodically to compensate for inflation and increases in the cost of living.


For the 2016 and 2017 tax years, you can contribute up to $5,500 to all IRAs combined (the limit is adjusted annually for inflation). If you have a traditional IRA as well as a Roth IRA, you can only contribute a total of the annual limit in one year, not the annual limit to each.

If you are age 50 or older, you can also make a $1,000 annual “catch-up” contribution.


Employer-sponsored retirement plans such as 401(k)s and 403(b)s have an $18,000 contribution limit in 2017 (unchanged from 2016); individuals aged 50 and older can contribute an extra $6,000 each year as a catch-up contribution. (Section 403(b) and 457(b) plans may also provide special catch-up opportunities.)


You can contribute up to $12,500 to a SIMPLE IRA or SIMPLE 401(k) plan in 2017, and an extra $3,000 catch-up contribution if you are age 50 or older (unchanged from 2016).

Distributions from traditional IRAs and most employer-sponsored retirement plans are taxed as ordinary income, except for any after-tax contributions you’ve made, and the taxable portion may be subject to 10% federal income tax penalty if taken prior to reaching age 59½ (unless an exception applies). If you participate in both a traditional IRA and an employer-sponsored plan, your IRA contributions may or may not be tax deductible, depending on your adjusted gross income.


The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2017 Broadridge Investor Communication Solutions, Inc.