The Roth 401k plan may be the best retirement vehicle ever!

Barely Half Of All 401k Plans Have A Roth Option

We’re big believers in giving your 401k participants the option of a Roth contribution for their retirement savings. Lower income participants are far better off using the Roth and enjoying tax free distributions during retirement.

Just how does a Roth 401k plan work? It’s pretty simple really:

  • Participants make AFTER-tax contributions to their 401k retirement plan
  • Those Roth contributions grow tax-deferred
  • Assuming the rules are followed, those monies are withdrawn completely tax-free in retirement

Why Is The Roth 401k Plan So Powerful?

Here’s a few key points to consider:
  • Tax-Free Withdrawals. If tax rates rise, you’re better off paying your taxes now at lower rates, then enjoying your tax-free Roth withdrawals later in retirement.
  • Progressive Taxes. Even if tax rates don’t rise, we’re in a progressive tax system. Many retirees will draw income from their pre-tax accounts up to certain brackets, and Roth tax-free assets into the next higher bracket. This allows them to smooth their taxes during retirement by keeping them in lower taxable brackets.
  • No RMDs. Under current law there are no required minimum distributions due on a Roth 401k (assuming it’s rolled into a Roth IRA). This gives you more flexibility and control over your taxes due and retirement cash flow.

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The Roth 401k Plan Is Amazing!

For lower income workers the tax relief from pre-tax contributions is minimal. Considering those assets will grow over your working lifetime-and the inflated amount will be withdrawn in retirement-it’s best to forego the current tax relief.

For workers in higher tax brackets (think 25%+) the pre-tax 401k option is likely a great bet! That being said, for the best long-term tax and investment benefits possible, some portion of your 401k savings should be allocated to the Roth 401k plan.

Allowing your participants the choice between pre-tax contributions AND after-tax Roth 401k contributions gives them ultimate flexibility to maximize their retirement as it best suits their unique situation.