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To Roth or Not to Roth

Summary:
A compelling feature of a 401(k) plan has always been the opportunity to contribute money from pre-taxed income, and then pay taxes on the accumulated balance as you withdraw it in future. But what if you flipped this and contributed money to your retirement savings account with post-tax dollars that you invested over time, then had the opportunity to withdraw the accumulated balance tax free… including the earnings.

  • Post date July 1, 2021
To Roth or Not to Roth

A compelling feature of a 401(k) plan has always been the opportunity to contribute money from your current income on a pre-tax basis today – let it work for you over the years – and then pay taxes on the accumulated balance as you withdraw it in future. That’s a real attraction to many company owners and their employees. But what if you flipped this – and contributed money to your retirement savings account with post-tax dollars that you invested over time and then had the opportunity to withdraw the accumulated balance tax free – including the earnings. That’s what happens in a Roth account.

Just like the original Roth IRA, the Roth 401(k) account has the specific advantage of growing tax-free, but the 401(k) version doesn’t have the associated income limits. When we offer a Roth feature in your plan, it’s managed as a separate source of money so that contributions, earnings, and distributions are tracked separately from pre-tax sources. Contributing money in a Roth account isn’t right for everyone. It depends on your age, your income, what tax bracket you’re in and what tax bracket you may likely be in at retirement. A Roth account tends to be most useful if you expect to be in a higher tax bracket when you retire than you’re in during the years while you’re contributing to your plan.

For example:

  • A Roth account can benefit a younger employee looking to get a jump on his retirement savings before he’s in a higher tax bracket later in his career.
  • It can also be helpful to a high income earner who would like to have a balance of tax-free money available in retirement.
  • It can also be helpful to a saver who may be close to the required minimum distribution age.

Offering a Roth feature does add responsibilities for you, your advisor, and recordkeeper to provide greater education and to engage with employees to explain the pros and cons of contributing to a Roth account.

We invite you to contact us and let’s discuss the details and benefits in establishing a Roth 401(k) account in your plan.

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