It neither takes mathematical machinations nor back of napkin calculations to determine that tax-free income is a great thing. But don’t take my word for it. Just ask any retiree. If they are honest, most will concur that they can only dream of tax-free income in their retirement.

Conversely, the few retirees that have a source of tax-free income would definitively tell you that they wished that:

  • They started earlier in their retirement planning.
  • They had a tax-free option available to them earlier in their working career, and,
  • That they maxed out their contributions into that option so as to have more tax-free income in their retirement.

To make certain that you achieve the retirement of your dreams quicker, the Board of Trustees has added the Roth 401(k) benefit to the cornucopia of benefits already offered through your participation in the Benefit Funds of the IBEW Local 697.

What does that mean?

Well, if you are a participant who:

  • Wants to have tax-free income in retirement.
  • Wants to be able to have their retirement savings last longer in their retirement.
  • Wants to pay no taxes on the interest earned on their retirement contributions.
  • Wants to retire on their own terms.
  • Wants to enjoy some “bragging rights” on the job site and/or over the grill this summer.
  • Wants to mitigate any adverse effects an increase in taxes would have on the quality of their future retirement.

You will need to read on and then take action.

What is a Roth 401(k)?

It’s an investment vehicle in which you can make contributions, post tax, and derive tax-free income on the investment returns during your retirement.

Who is eligible for a Roth 401(k)?

Everyone who participates in the IBEW Local 697 Benefit Funds are eligible.

Are there limits to the amount that I can contribute?

For calendar year 2022, the limit is $20,500.00. (If you are 50 or above, the IRS permits you to contribute an extra $6,500 as a “catch-up contribution.” Which means that the contribution limit for those who are 50 and above is $27,000 in 2022.) However, and be advised, that $20,500.00 limit applies to all 401(k) contributions that you make to any 401(k) plan, regardless of if that plan is a traditional 401(k) plan or a Roth 401(k) plan. There are several important words in that previous sentence, the least of which is the word “you”. That word was written specifically to differentiate your contributions from that of any employer contributions. The latter of which, do not count toward that $20,500.00 limit. Which is great! Another great thing about the Roth 401(k) and unlike its cousin, the Roth IRA, the Roth 401(k) has no household income limits which could prohibit you from making contributions to the maximum allowable yearly limit.

Is there a catch to receiving tax free income?

Of course there is. There is always a catch. But this catch is rather small in the grand scheme of your working career and retirement lifespan. The catch is that the IRS requires that you have the Roth account open for at least five years. If you do that, all earnings grow tax-free. Very nice, right?

Think of this in another way. By virtue of performing unit work under a IBEW Local 697 Collective Bargaining Agreement, the heavy lifting of planning and saving for a significant portion of your retirement has already been addressed in the form of:

A) The IBEW & Electrical Industry Pension Plan.
B) The Money Purchase Plan and Trust.
C) Both the IO and NEBF Pensions and let’s not forget,
D) The Retiree Self Payment Monthly Benefit Allowance (aka “Plan P”)
E) The HRA Benefit, and
F) The S.U.B. Fund.

So the question is why wouldn’t you do all that you could to maximize this benefit to achieve the retirement of your dreams, to get to that retirement quicker and to have a source of tax-free retirement income?

Any other advantages?

Shouldn’t tax free earnings be sufficient? No? Really? Ok. How about having the ability to sidestep the IRS’s requirement for minimum distributions at 72 (70 ½ if you turned 70 ½ in 2019 or earlier) or the ability to pass down these monies to your heirs in a manner that allows them to not pay taxes on the distributions?

Regarding that, if your heirs didn’t love you before inheriting those monies, I have news for you, the inheritance of tax-free monies will most likely not change that. However, I guarantee that they will think you were very smart and as a result may talk highly about you at your wake. On the other hand, what would they say if you didn’t take advantage of this opportunity…………?

Moreover, what would future you say to yourself about not taking advantage of building tax-free retirement income?

But you, my friend, do not have to worry about that as you are going to be the hero in the life of future you. You are going to make your future easier and brighter. And because of that, you are going to achieve a full and satisfying retirement. How? By acting today and being consistent with your post tax contributions into the new Roth 401(K) feature. Simple.

What happens if I access the money within this benefit prior to five years?

There is a penalty. The penalty is not assessed by the Plan. It is an IRS penalty. The good news is that the penalty is only assessed on any earnings made and not on the post-tax monies you contributed into this account.

Further, if pulling out some of the contributions, but not all, only the pro-rata earnings made on the contribution amount pulled out, will be taxed. This allows the participant to limit the amount of taxes and IRS penalties incurred at any one time.

The early withdrawal penalty assessed by the IRS is 10%. That IRS penalty may be assessed on top of regular taxes on the withdrawn earnings. However, there are exceptions to these IRS penalty rules that would allow a participant to avoid taxes and penalties. An example of which would be if you use the monies to buy your first home, or if you become permanently disabled.

But again, and for the reason that you are a person who understands:

  • The power of compounding interest.
  • How to make money work hard for you.
  • That withdrawn monies never have the ability to compound.
  • That the earnings that you would have earned had you left the money alone will never earn interest.

you’re not going to withdraw the monies early. As such, you have nothing to worry about!

How are my contributions invested?

You can invest these monies in any percentage and/or amount within any of the investments already approved and offered within the Money Purchase Plan and Trust at Vanguard.

The first contribution and any subsequent contributions will be invested in the exact same investments and in the exact same ratio that you have already elected to have the employer contributions invested within your Money Purchase Plan & Trust account. Once the initial contribution is made, you can change the way the initial and all subsequent Roth contributions that you make in any manner you wish within those approved investment funds.

How do I make my Roth contribution?

Making Roth contributions couldn’t be any easier. With your permission, the Fund will make automatic and systematic monthly deductions from whatever account you want and in whatever amount you wish to contribute. Just call up the Fund Office (219-940-6181) request the form, fill it out and send it in to the Fund Office.

The secret is to start right away and to make systematic and continuous contributions into the Roth investment. How much you invest is up to you. However, when deciding how much to invest ask yourself this, how do I want to live in my retirement?

Is there anything else I should know?

Start making Roth contributions right away. Why? Tax-free is better than tax-deferred, plus you already have a tax-deferred retirement account in the form of the Money Purchase Plan & Trust.

Secondly, the longer the money is invested, the more potential it has to grow. Compounding is your friend and time is your friend. That holds true for the participants that plan to retire soon. Remember, you will most likely have a very long retirement in which these contributions could be working to generate tax free income for you later on.