Roth 401(k) Accounts on the Rise: What You Need to Know
More Employers Offering Roth Savings Options
A significant shift is underway in the world of retirement savings. An increasing number of employers are adding Roth savings options to their workplace 401(k) plans, and it’s likely that this trend will continue. According to a recent survey, about 93% of 401(k) plans now offer a Roth account, up from 89% in 2022 and 62% a decade ago.
Understanding Roth Accounts
So, what’s the difference between a Roth account and a traditional pretax account? With a Roth account, you pay taxes upfront on your contributions, but you won’t have to pay taxes when you withdraw the money in retirement. With a pretax account, you get an upfront tax break, but you’ll pay taxes on your withdrawals later.
Choosing the Right Option
Deciding which type of 401(k) contribution to make – pretax or Roth – depends on your current tax bracket and your expectations about your future tax rate. Financial advisors recommend considering your current income level and whether it’s likely to increase in the future. For example, if you’re early in your career and in a low tax bracket, a Roth account might be a good choice.
Benefits of Roth 401(k) Accounts
Roth 401(k) accounts offer some unique benefits. Unlike Roth IRAs, which have income caps and lower contribution limits, Roth 401(k) accounts have no income caps and allow higher earners to contribute more money to a Roth account. Additionally, diversifying your savings between pretax and Roth accounts can provide tax flexibility in retirement.
Legislative Changes on the Horizon
A 2022 retirement law known as Secure 2.0 will require high earners to make “catch-up” 401(k) contributions to Roth accounts starting in 2026. This change is likely to lead to even more employers offering Roth accounts in the near future.
Employer Matching Contributions
Secure 2.0 also allows businesses to make employer 401(k) contributions, like a match, as Roth savings. This could provide an added incentive for workers to take advantage of Roth accounts.
What It Means for You
As more employers offer Roth 401(k) accounts, it’s essential to understand the benefits and consider whether a Roth account is right for you. By choosing the right type of 401(k) contribution, you can minimize your tax bill and maximize your retirement savings.
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