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 process 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/her retirement savings before he/she enter a higher tax bracket later in his/her career.
- It may also benefit 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 engage with employees by explaining the pros and cons of contributing to a Roth account.