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Retirement savers, take note: An increasing number of employers are adding Roth savings options to their workplace 401(k) plans.
And, thanks to changes in legislation, it’s likely that the remaining holdouts will soon offer the service as well.
About 93% of 401(k) plans will offer Roth accounts by 2023, according to an annual poll released in December by the American Council of Plan Sponsors, an employer trade group.
The survey, which surveyed more than 700 employers with 401(k) plans of varying sizes, showed that this proportion is up from 89% in 2022 and 62% 10 years ago.
What is the difference between Roth pre-tax 401(k) savings?
Ross pointed to the way retirement savings are taxed.
Roth accounts are after-tax accounts: Savers pay taxes on their 401(k) contributions upfront, but, with certain exceptions, don’t pay taxes later when they withdraw the funds.
In contrast, pre-tax savings have been the traditional route to 401(k) plans. Savers can receive an upfront tax break, deferring the tax bill on investment gains and contributions until withdrawals are made later.
It seems many people aren’t taking advantage of Roth availability: About 21% of eligible workers made Roth contributions in 2023, compared with 74% before taxes, according to PSCA data.
How to Choose Between Roth Contributions or Pre-Tax Contributions
Financial advisors say which 401(k) contribution you choose — pre-tax or Roth — depends largely on your current taxes and your expectations for future tax rates.
You want to choose one that will keep your tax bill as low as possible. In short, this is a Tax bets.
This requires some educated guessing. For example, many financial advisors recommend Roth accounts to people early in their careers, when their tax brackets are likely to be lower than they will be in the future, when their salaries will almost certainly be higher.
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“We always recommend (Roth) to lower-income people, typically young working adults,” said Olga Ismail, director of retirement planning consulting at Provenance Wealth Advisors.
“This is the lowest tax bracket you’re going to have, so why not take advantage of it now if you can?” she said.
A Roth 401(k) also offers unique savings opportunities. A Roth Individual Retirement Account (or Roth IRA) has lower annual contribution limits than a 401(k) account, and there are income caps on eligibility. A 401(k) has no income cap. Therefore, a Roth 401(k) allows high earners direct access to Roth accounts and allows all savers to deposit more money into a Roth account than they would otherwise.
Financial planners also often recommend diversification into pre-tax and Roth savings. This gives tax flexibility in retirement.
For example, strategically withdrawing funds from Roth accounts to generate income may prevent some retirees from triggering higher Medicare Part B and Medicare Part D premiums. Included in taxable income.
Additionally, while many people expect tax rates to drop after retirement, this is not always the case.
Why Roth 401(k) adoption is increasing
More savers may soon have a Roth 401(k) option if they don’t already have it.
A 2022 retirement law called 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). that rule Take effect 2026.
Ismail said high-income earners age 50 or older will be required to deposit any additional savings above their annual 401(k) limits into Roth accounts, meaning nearly all 401(k) plans will likely be required to offer Roth accounts.
In 2024, workers can save up to $23,000 in a 401(k) plan.
PSCA research director Hattie Greenan said that “offering a Roth as an option has become best practice over the past few years” and that because of the mandate for higher earners, “we will continue to see Ross became commonplace”.
Additionally, Secure 2.0 allows businesses to make employer 401(k) contributions just like Roth savings. About 13% of employers said they would “definitely” add the option, while another 35% said they were still considering it, PSCA data shows.
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