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If you’re saving for retirement, be careful. More and more employers are adding Roth savings options to their workplace 401(k) plans.
And with the legal changes, the remaining resistance groups are likely to propose it soon as well.
About 93% of 401(k) plans offered Roth accounts in 2023, according to an annual poll released in December by the Plan Sponsor Council of America, an employer trade group.
That rate is 89% in 2022, up from 62% a decade ago, according to the study, which surveyed more than 700 employers with 401(k) plans of various sizes.
Roth pre-tax 401(k) savings difference
Ross mentions how retirement savings are taxed.
A Roth is an after-tax account. Savers pay taxes upfront on their 401(k) contributions, but with some exceptions, they don’t pay them later when they withdraw the money.
In contrast, pre-tax savings have been the traditional route for 401(k) plans. Savers receive an upfront tax break and defer paying taxes on investment gains and contributions until the time of withdrawal.
About 21% of eligible workers made Roth contributions in 2023, compared to 74% who made pre-tax contributions, according to PSCA data.
Choosing between Roth and pre-tax contributions?
According to financial advisors, which type of 401(k) contribution you choose to make (pre-tax or Roth) depends primarily on your current tax bracket and your expectations for future tax rates.
You want to choose the one that will minimize your taxes. In short, it’s a tax gamble.
This requires some educated guessing. For example, many financial advisors recommend Roth accounts for people early in their careers. At this point, your tax rate may be lower than in the future, when your salary will almost certainly be higher.
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“We always recommend [Roth] It’s for low-wage people, typically younger workers,” said Olga Ismail, head of retirement planning consulting at Providence Wealth Advisors.
“This is the lowest tax rate ever, so why not take advantage of it now if you can?” she said.
Roth 401(k)s also offer unique savings opportunities. Roth Individual Retirement Accounts, or Roth IRAs for short, have lower annual contribution limits than 401(k)s and income limits for eligibility. A 401(k) has no income limit. Therefore, a Roth 401(k) gives high-income earners direct access to a Roth account and allows all savers to contribute more funds to a Roth account than they would otherwise be able to do.
Financial planners generally recommend diversifying between pre-tax and Roth savings. This gives you tax flexibility in retirement.
For example, strategically withdrawing money from a Roth account for income can prevent some retirees from increasing their Medicare Part B and Medicare Part D premiums. These premiums can increase with your income, but Roth withdrawals don’t count as taxable income.
Also, while many people expect their tax rate to go down in retirement, that doesn’t always happen.
Why Roth 401(k) adoption is increasing
If you haven’t already taken advantage of the Roth 401(k) option, it will soon be available to more savers.
The Retirement Act of 2022, known as Secure 2.0, would require workers to make “catch-up” 401(k) contributions to a Roth account if their income exceeds $145,000 (indexed for inflation). This rule goes into effect in 2026.
High-income earners over age 50 are required to contribute additional savings above their 401(k) limits to a Roth account each year, which may require nearly all 401(k) plans to offer a Roth account. Ismail said it means having a high level of sexuality.
Workers can save up to $23,000 in their 401(k) for 2024. Employees age 50 and older can save an additional $7,500 in catch-up contributions.
“Offering Roths as an option has been best practice for several years,” said PSCA research director Hattie Greenan, adding that the mandate for high earners “will continue to make Roths more common.” Probably.”
Additionally, Secure 2.0 allows companies to make employer 401(k) contributions similar to Roth savings. About 13% of employers said they would “definitely” add this option, and another 35% said they were still considering it, according to PSCA data.
