Roth 401(k)s: An Underused Opportunity

Roth 401(k)s have been gaining popularity among companies, yet the majority of employees are failing to take advantage of them. Experts strongly recommend contributing to these after-tax retirement accounts, as they offer significant advantages.

A Missed Opportunity

Recent data from Vanguard shows that 8 out of 10 retirement plans administered by the company include a Roth option. Surprisingly, only 17% of participants in these plans actually make use of it.

A Spotlight on Roth Accounts

Roth retirement accounts recently made headlines due to a decision by the Internal Revenue Service. The IRS postponed a requirement for higher earners to make age-related "catch-up" contributions exclusively with post-tax dollars, extending the deadline by two years. It's worth noting that Roth contributions are taxed upon deposit, but withdrawals made during retirement are generally tax-free. On the other hand, traditional retirement accounts provide tax-free contributions but are subject to taxes upon withdrawal in retirement.

A New Direction

Individuals aged 50 and over have the opportunity to make an annual catch-up contribution. In 2023, this amount can reach up to $7,500 on top of the regular $22,500 cap on 401(k) contributions. However, starting in 2026, catch-up contributions must be made to after-tax Roth 401(k) accounts, rather than the traditional tax-deferred 401(k) option. This change implies that diligent savers may pay more in taxes now, yet enjoy reduced tax liabilities during their retirement years.

Choosing the Right Path

Common wisdom suggests that Roth accounts are best suited for younger individuals in lower tax brackets. Older individuals in their peak earning years tend to benefit more from the tax-deferred contributions offered by traditional retirement accounts.

Embrace the opportunity to maximize your retirement savings with Roth 401(k)s. Take advantage of the potential tax benefits and secure your financial future.

Maximizing Retirement Savings: The Benefits of Roth Accounts

It's not as simple as black and white, according to experts. While many high earners who save diligently in their traditional retirement accounts may assume they'll be in a lower tax bracket during retirement, this may not always be the case. Opting to pay taxes upfront and reducing required minimum distributions from tax-deferred accounts in retirement can potentially be more advantageous. Required distributions, which currently commence at age 73, have the potential to push individuals into higher tax brackets and also lead to higher Medicare Part B and Part D premiums.

Fortunately, experts suggest that having a portion of your savings in after-tax Roth dollars can provide more flexibility in managing your income during retirement. As long as certain conditions are met, Roth withdrawals are not included in your taxable income. By utilizing after-tax funds to cover living expenses, you may potentially remain in a lower tax bracket and avoid the burden of increased Medicare premiums if you are a high-income individual.

Furthermore, one notable advantage of Roth accounts over traditional 401(k)s is that they can typically be passed on to beneficiaries without incurring taxes. This makes them an attractive option for those who wish to leave a tax-free inheritance.

Now comes the important question: how much should you contribute to a Roth account? There's no need to predict your future income or tax rates. While individual circumstances may vary, financial expert David Merrell of TBH Advisors in Brentwood, Tenn., offers a general rule of thumb: if maximizing your current income is not your priority, consider making post-tax contributions to a Roth account. On the other hand, if you strive to make the most of every dollar from your paycheck, taking advantage of the tax break offered by traditional retirement account contributions might be the better choice for you.

For those who desire a more specific approach, associate finance professor David Brown from the University of Arizona has devised a formula applicable to individuals of all income levels. By adding 20 to your age and allocating that percentage to your traditional retirement account, while allocating the rest to a Roth account, you can ensure a balanced approach to your retirement savings. For instance, a 40-year-old could contribute 60% to a traditional retirement account and 40% to a Roth account.

In conclusion, considering the long-term benefits and flexibility that Roth accounts offer, it's worth exploring the option of including after-tax Roth contributions in your retirement savings strategy. By doing so, you can potentially optimize your tax situation and secure a tax-free inheritance for your loved ones in the future.

A New Approach to Saving Money

In today's uncertain economic climate, it's more important than ever to prioritize saving money. Financial expert, Brown, emphasizes the significance of setting aside post-tax funds. Regardless of the specific allocation, Brown advises readers to consider investing in a Roth account, even if they already have a traditional one.

By diversifying your savings strategy and including a Roth account, you can ensure a more secure financial future. The decision to allocate funds towards both traditional and Roth accounts will ultimately depend on your unique circumstances and long-term financial goals.