Retirement plans

The Vanguard Group, Inc.

Adobe

Find out about the following Adobe 401(k) Retirement Savings Plan topics:

  • Traditional after-tax contributions
  • Roth contributions
  • Roth in-plan conversions

Please click on the tabs above to learn more about each of these new features.

All investing is subject to risk, including the possible loss of the money you invest.

Traditional After-Tax Contributions

Traditional after-tax contributions offer an alternative to the pre-tax and Roth 401(k) after-tax contributions already available in the Adobe 401(k) Plan and allow you to contribute above the IRS contribution limit for pre-tax and Roth 401(k) after-tax contributions. In addition, traditional after-tax money can be converted to Roth (see Roth In-Plan Conversions to learn more about this option).

Note: Traditional after-tax contributions are not eligible for company matching contributions.

The Basics

The difference among pre-tax, Roth 401(k) after-tax and traditional after-tax contributions is how they are taxed, both today and in retirement.

  • Pre-tax contributions. This money is not taxed when it is put into your account, leaving more money to work for you. Pre-tax contributions and any earnings continue to grow tax-free until you start making withdrawals—usually during retirement, when you may be in a lower tax bracket.*
  • Roth 401(k) contributions. Roth contributions are made with after-tax dollars. You pay taxes now on Roth contributions, but you will not pay income tax on contributions or earnings when you make withdrawals from your Roth 401(k) balance, provided you have turned age 59½ and have held your Roth 401(k) account for at least five years.*
  • Traditional after-tax contributions. Like Roth contributions, traditional after-tax contributions are made with after-tax dollars. You will not owe taxes on a withdrawal of your traditional after-tax contributions. However, you will owe income taxes on the portion of the withdrawal that represents earnings on those contributions (as well as a 10 percent federal penalty tax if you are under age 59½).

Your Options at a Glance

Provision Pre-tax contributions Roth after-tax contributions Traditional after-tax contributions
Contributions Pre-tax dollars After-tax dollars After-tax dollars
Contributions subject to tax at distribution* Yes No No
Earnings subject to tax at distribution* Yes No, if you meet certain requirements. Yes
Tax penalty on distributions before age 59½* 10 percent federal penalty tax on contributions and earnings. 10 percent federal penalty tax on earnings but not contributions. 10 percent federal penalty tax on earnings but not contributions.
Maximum annual contributions Subject to annual IRS personal contribution limits.

Also subject to the annual IRS total defined contribution plan limit.
Subject to annual IRS personal contribution limits.

Also subject to the annual IRS total defined contribution plan limit.
Not subject to annual IRS personal contribution limits.

However, contributions are subject to the annual IRS total defined contribution plan limit.

A note about contribution limits

You can contribute 1 percent to 65 percent of your pay on a pre-tax, Roth 401(k) after-tax, or traditional after-tax basis (or a combination of the three).

The IRS also limits contributions. For 2018, the IRS will limit your pre-tax and Roth 401(k) after-tax contributions to $18,500 ($24,500 if you are age 50 or older). In addition, the IRS also limits the sum of all contributions (including your pre-tax, Roth 401(k) after-tax, and traditional after-tax contributions, as well as employer matching contributions) to $55,000 ($61,000 if you are age 50 or older). For more information, visit vanguard.com/contributionlimits.

Note: Highly compensated employees will not be subject to additional limits on traditional after-tax contributions. However, if the Plan does not pass its annual testing, highly compensated employees may get a refund of some of the money they contributed to the Plan that year.

How to take action

You can begin making traditional after-tax contributions at any time. To do so, log on to your account at vanguard.com/retirementplans.

Important Note for Maximum Savers
Traditional after-tax contributions are not subject to IRS annual limits on individual pre-tax and Roth after-tax contributions (although they are still subject to the limit of the sum of individual and employer contributions). So, you may want to consider making traditional after-tax contributions after you reach the IRS contribution limit for your individual pre-tax and Roth 401(k) after-tax contributions.

All investing is subject to risk, including the possible loss of the money you invest.

*Tax implications: You will be responsible for paying any federal, state, local or foreign taxes on a distribution or withdrawal from pre-tax accounts. A distribution or withdrawal of Roth 401(k) earnings is usually also taxable unless the initial Roth contribution was made more than five years ago and you are at least age 59½. Early withdrawals may be subject to a 10 percent federal penalty tax. To the extent required by law, Vanguard will make the appropriate withholding for tax purposes.

Roth Contributions

Considering making Roth contributions to your Plan account? They can be beneficial because you pay taxes up front. You will not have to pay taxes on your contributions or on any of their earnings when you take the money out, as long as you have met the requirements.*

But, how do you know if Roth is right for you? Consider these guidelines:

Who might benefit from Roth contributions?
If you are financially well-prepared for retirement, Roth contributions can make sense. Strong savers and those with generous retirement benefits may face some pretty big tax obligations in retirement. Having tax-exempt savings could lessen the burden.

You might benefit by making Roth contributions if:

  • You are at the start of your career and you expect your income to rise substantially over the years.
  • Your income is too high to save in a Roth IRA.
  • You are in a low tax bracket today—10 percent or 15 percent.

Who might not benefit from Roth contributions?
You might not benefit from Roth contributions if you expect Social Security to be your main source of retirement income. In that case, your income—and tax rate—may drop in retirement.

You may also not benefit if:

  • You receive commissions or bonuses that may cause your pay to spike, temporarily lifting you into a higher tax bracket.
  • Your income qualifies you for valuable tax credits such as the earned income tax credit. Making Roth contributions could push your income over the eligibility limit for these credits.

Ready to make Roth contributions?
Log on to your account at vanguard.com/retirementplans.

* Withdrawals from a Roth 401(k) are tax-free if you are over age 59½ and have held the account for at least five years. If you take a withdrawal from your Roth 401(k) account before age 59½ or less than five years from the first contribution, the portion of the withdrawal that is attributable to earnings will be subject to ordinary income tax and a 10 percent federal penalty tax.

Roth In-Plan Conversions

The Roth in-plan conversion feature will allow you to convert all or a portion of your pre-tax and/or traditional after-tax savings to Roth money within the 401(k) Plan.

The Advantages—and Costs—of a Roth Conversion
Roth money, including any earnings, can be withdrawn tax-free if you are age 59½ or older and the Roth account has been established for at least five years.*

Tax-free withdrawals could be a significant benefit in retirement. However, any potential future tax benefit must be weighed against the cost of a conversion today. You would owe ordinary income taxes on pre-tax money converted to Roth in the tax year of the conversion. In general, if you convert after-tax money to Roth, you would owe taxes on the portion of the conversion that represents earnings on that after-tax money. These taxes would need to be paid with money from outside the Plan when you file your income taxes for the year in which the conversion was made. One way to reduce the amount of taxes you owe when converting traditional after-tax money to Roth is to complete a conversion after every paycheck instead of waiting until the end of the year.

Consult a Tax Advisor Before Acting
Converting to Roth is not right for everyone. It depends greatly on your circumstances, including your current and estimated future tax rates. We recommend that you consult a tax advisor before taking any action.

As you weigh your decision, here are three important questions to answer:

Question Answer
How much tax will you owe on the conversion? The tax on a conversion could be significant. You or your tax advisor should determine whether the amount you convert to Roth would raise your taxable income enough to push you into a higher income tax bracket or cause other adverse tax consequences.
Do you have money outside the Plan to pay the tax? If you have not experienced a distributable event (such as termination from employment or the availability of an in-service withdrawal) and therefore do not have access to savings within the Plan, you will have to pay any taxes due on the converted amount with money from outside the Plan.

If you do have access to your Plan savings and are planning to pay any conversion tax with money from your Plan account, you will owe regular income taxes and, if you are younger than age 59½, an additional 10 percent federal penalty tax on the money you withdraw.
Can you wait five years before taking Roth withdrawals? In general, converted amounts withdrawn within five years of the conversion are subject to a 10 percent federal penalty tax. A separate five-year holding period applies to each conversion.

How to take action

If you decide to elect a Roth in-plan conversion, you can do so by calling Vanguard Participant Services at (800) 523-1188. Associates are available Monday – Friday from 5:30am – 6:00pm PT.

You can elect to convert a specific dollar amount or a percentage of your account to Roth.

All investing is subject to risk, including the possible loss of the money you invest.

*Tax implications: You will be responsible for paying any federal, state, local or foreign taxes on a distribution or withdrawal from pre-tax accounts. A distribution or withdrawal of Roth 401(k) earnings is usually also taxable unless the initial Roth contribution was made more than five years ago and you are at least age 59½. Early withdrawals may be subject to a 10 percent federal penalty tax. To the extent required by law, Vanguard will make the appropriate withholding for tax purposes.