by Carolyn Rothwell on September 15, 2017

4 Things to Know about Roth 401(k)s in your Financial Planning Software


Money Tree's big-picture and in-depth financial planning software, include provisions for Roth 401(k) retirement savings plans. 401(k) plans with a Roth option are an attractive retirement savings option, making it possible for employees to save with either pre-tax or after-tax contributions.  A Roth 401(k) provides tax-free earnings and distributions after age 59.5, without income limitations or lower maximum contributions of traditional Roth IRAs.  This post highlights some important elements to model Roth 401(k) accounts in client plans. 

4 Things to Know about Roth 401(k) Treatment in Silver and TOTAL:

1) Current Balance - Roth 401k vs. 401k

A Roth 401(k) is not a separate retirement plan, but a feature of a 401(k) allowing an option to make pre-tax contributions to a designated Roth account. 401(k) plans with a Roth option must track the designated Roth account separately. When entering 401(k) with a Roth option for a financial plan, a distinction of the pre-tax and after-tax balance needs to be made for accurate taxation.  

The current balance of an asset entered as a Roth 401(k) is treated as the designated Roth account, in entirety. Retirement savings setup as a Roth 401(k) should reflect the balance made up of after-tax employee contributions and growth of those contributions only. The balance and account earnings will not be subject to taxes upon withdrawal. 

The current balance of the 401(k), made up of employer contributions and pre-tax employees contributions, along with the earnings, should be entered as a separate asset with the type of 401(k). The balance of the 401(k) and account earnings will be subject to taxes upon withdrawal. 

Roth401kInput_Silver-1.png
Roth 401(k) reflecting the Roth account and 401(k) as a separate account in Silver. 

2) Personal Contributions (Pre and Post-Tax)

401(k) plans with the Roth option have a maximum personal contribution of $18,000, with an additional catch-up provision allowing for a total of $24,000 for those 50 or older for 2017.  The contribution can be split between accounts, but the combined amount cannot exceed the deferral limit. 

After-Tax ContributionsIf the employee is making after-tax contributions to the designated Roth account, enter the contributions using the Roth 401(k) asset.

Pre-Tax Contributions - If the employee is making pre-tax contributions, enter the contributions to the 401(k) asset.  

3) Employer Contributions

Employer contributions always go to the 401(k). Employer contributions can be added to either the 401(k) or Roth 401(k) asset, the financial planning software will assign the contributions to the 401(k).  

Roth401kInputContributions_Silver.pngRoth 401(k) with both employee and employer contributions in Silver. 

PersonalAdditionsRoth401kSilver.pngRoth 401(k) report showing employee contributions only in Silver. 

CompanyAdditionsRoth401kSilver.pngTax-Deferred retirement accounts (401k) report showing employer contributions in Silver. 

4) Required Minimum Distributions

Required Minimum Distributions will be taken from both the 401(k)  and the Roth 401(k) account, as required by law.  The RMDs, like others withdrawal after age 59.5 are tax-free. 

RMDsRoth401kSilver.pngRoth 401(k) starting RMDs in Silver. 

A common strategy to roll a Roth 401(k) to a Roth IRA to eliminate the requirement to take RMDs, but that is not an assumption of the financial planning software.  The software is designed to follow the legal rule, and lean towards conservative assumptions.   

If the client plans to roll a Roth 401(k) to a Roth IRA, the simplest solution is to set up the Roth 401k as a Roth IRA.  Any company contributions need to be entered to a 401k asset, as Roth IRA's do not allow for a company contribution.  This simple solution works without issue in TOTAL, but there is an important caveat to using this method in Silver.  

Silver's Roth IRA contributions are limited to the deferral limit, which is $5,500 (or $6,500 for those 50 or over) in 2017.  If the employee addition exceeds that amount, it is best to stick with the asset type of Roth 410(k) and include the RMDs.  The only other option would be to split the contributions, showing the maximum amount going to the Roth IRA and any contribution exceeding the allowable deferral  going to a Roth 401(k),  reducing the account balance subject to RMDs.  


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Carolyn Rothwell

Carolyn enjoys spending her time building Money Tree Software's brand and products. Her experience creating and delivering financial plans for a full-service financial planning firm and supporting advisors working to provide the best planning to their clients as a Money Tree support member has provided an excellent understanding of the importance financial planning.