Retirement savers, take note: more employers are now offering a Roth savings option in their workplace 401(k) plans. This change is due to a legislative update, which is expected to make Roth accounts more widely available in the near future.
According to a recent survey conducted by the Plan Sponsor Council of America, about 93% of 401(k) plans now include a Roth account option. This is a significant increase from just a decade ago when only 62% of plans offered this feature. The survey, which polled over 700 employers with 401(k) plans of varying sizes, indicates a growing trend towards including Roth savings in retirement plans.
For those unfamiliar with the difference between Roth and pretax 401(k) savings, the key distinction lies in how contributions are taxed. With a Roth account, savers pay taxes upfront on their contributions, but generally do not owe taxes on withdrawals later on. On the other hand, pretax savings involve deferring taxes on contributions and earnings until retirement, when withdrawals are made.
Despite the availability of Roth accounts, data shows that only 21% of eligible workers made a Roth contribution in 2023, compared to 74% who opted for pretax contributions. Financial advisors suggest that the decision between Roth and pretax contributions should be based on individual tax brackets and future tax rate expectations.
Experts recommend Roth accounts for younger workers who are likely in a lower tax bracket now than they will be in the future. By paying taxes upfront while in a lower tax bracket, savers can potentially save money in the long run. Additionally, a Roth 401(k) offers unique advantages, such as higher contribution limits compared to Roth IRAs and no income eligibility restrictions.
Financial planners also advise diversifying savings between pretax and Roth accounts to provide tax flexibility in retirement. Strategic withdrawals from a Roth account can help retirees manage their taxable income and potentially avoid higher premiums for Medicare Part B and Part D. Furthermore, while many assume their tax rates will decrease in retirement, this is not always the case.
The adoption of Roth 401(k) accounts is expected to increase further due to the Secure 2.0 retirement law. Starting in 2026, high earners over the age of 50 will be required to make catch-up contributions to Roth accounts if their income exceeds a certain threshold. This mandate is likely to prompt more employers to offer Roth options in their 401(k) plans.
In conclusion, the shift towards Roth savings in 401(k) plans is a positive development for retirement savers. By understanding the differences between Roth and pretax contributions and considering individual tax situations, workers can make informed decisions to maximize their retirement savings. With more employers expected to offer Roth options in the future, it’s important for savers to stay informed and take advantage of these opportunities for tax-efficient retirement planning.
