Taking Advantage of a Roth Contribution Option Can Give You Some Flexibility in Retirement
According to Vanguard’s “How America Saves 2024,” 82% of employers offer a Roth 401(k) option in addition to a traditional, or regular, 401(k) option. However, just 17% of employees contribute to a Roth. If you have access to a Roth 401(k) option through your employer, it can add some diversity and flexibility to your retirement income and tax strategy. Roth or regular? Here’s what to consider:
Contributions
Contributions to a Roth 401(k) are made with after-tax dollars, unlike a traditional 401(k) where contributions are made with pre-tax dollars.
This means you pay taxes on the money before it goes into your Roth 401(k), but you don’t pay taxes on the money (including any earnings) when you withdraw it in retirement. With a traditional 401(k), you pay taxes on the money (including any earnings) when you withdraw it in retirement.
Both accounts share the same contribution limit. In 2024, you can contribute up to $23,000 ($30,500 if you’re 50 or older). You can contribute to both accounts in the same year, as long as you keep your total contributions under that cap.
Withdrawals
Withdrawals of any contributions and earnings from a Roth 401(k) are tax-free, which can be beneficial if you expect to be in a higher tax bracket in retirement. However, certain criteria must be met:
- The Roth 401(k) account must have been held for at least five years.
- The withdrawal must have occurred when you reach at least age 59½.
- Tax-free withdrawals can also be taken due to disability, or by a beneficiary upon your death.
With a traditional 401(k), Required Minimum Distributions (RMDs) must begin at age 73. However, starting in 2024, a Roth 401(k) does not require RMDs during the account holder’s lifetime. Each year you have the freedom to withdraw whatever amount you want from your Roth 401(k) and let the rest continue to potentially grow on a tax-deferred basis.
Employer Matching
If offered, an employer match is typically available to you whether you save through a Roth 401(k) or traditional 401(k). For details on how your plan handles employer-matching contributions, check with your plan administrator.
Diversifying Your Contributions
No one knows what the tax brackets will be in the future, so you could decide to diversify your contributions evenly between the traditional and Roth option. Depending on your circumstances, you can always decide to contribute more toward one or the other in the future. In any event, a Roth option gives you the flexibility to further customize your plan based on your unique needs.
Informational Sources: Vanguard: “How America Saves Report 2024”; Bankrate.com: “Roth 401(k) vs. 401(k): Which one is better for you?” (January 12, 2024).
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Incorporating a Roth 401(k) into your retirement strategy can offer invaluable flexibility when it comes to managing your taxes and withdrawals in retirement. Whether you expect to be in a higher tax bracket down the road or simply want more control over when and how you access your savings, the Roth option provides a powerful tool for long-term planning. Balancing both Roth and traditional contributions may provide an effective hedge against future uncertainties, giving you peace of mind and a more robust financial foundation.
Ready to optimize your retirement strategy? Let’s work together to design a plan tailored to your unique goals and circumstances. Reach out today to schedule a consultation and take the next step toward securing your financial future.
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Disclosure: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. Investment Advice and 3(38) Investment Fiduciary services offered through Diversified Financial Advisors, LLC, a Registered Investment Advisor. 3(16) Administrative Fiduciary Services provided by PISTL Service Corporation. Discretionary Trustee services provided by Printing Industries 401k Trustees. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
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