Five Reasons Your Employees Will Love a Roth 401(k) Account
posted by Fisher 401(k) November 22, 2016
Do your employees seem to be ignoring the Roth account available in your 401(k) plan? Or, like just under half of all employers, maybe you haven’t added one to your plan yet.1 In either case, it might be time to take a harder look at a Roth account—and help your employees do the same. Roth accounts provide some distinct advantages for your employees, and can play a substantial role in helping them retire comfortably on their terms.
Roth accounts can be made available to your employees as part of your company-sponsored retirement plan,2 or through an Individual Retirement Account (IRA). In a traditional 401(k) or IRA, contributions go into the plan before income taxes are paid. Income taxes are then payable upon withdrawal, typically during retirement.
Roth accounts take the opposite approach. Contributions are made with money that has already been taxed, and no income taxes have to be paid when that money and the interest it has earned is withdrawn at retirement.
Roth accounts are a particularly good way for employees in a lower tax bracket to save, because those employees will contribute money that has already been taxed at a lower rate. Even better, they won’t have to pay income taxes on the Roth account’s investment growth, which could be substantial by the time the saver retires and needs the money. Take a look at these key benefits to help you decide if adding a Roth option is right for your businesses:
- Roth accounts allow employees to take advantage of different tax strategies. The “Roth versus traditional” decision isn’t all or nothing. Employees can decide each year whether (and how much) to contribute to the Roth account. Generally, saving through a Roth is advantageous when your earnings are low, and therefore your tax rate is low. Your savings strategy should take into account your future income forecast: Utilize a Roth when your tax rate is lower, but consider altering your strategy if you start earning more money and reach a higher tax bracket.
- In retirement, Roth account withdrawals mean lower taxable income. Why would that be an advantage? Because some programs are based upon an individual’s Adjusted Gross Income (AGI)—an algorithm that determines whether certain subsidies are available. Roth income is not included in the AGI calculation, however, which could mean the difference between receiving and not receiving a health care subsidy—which is especially valuable to an early retiree who is not yet eligible for Medicare.
It’s true employees can seek out a Roth option on their own, through an IRA. Adding a Roth account to your company 401(k) gives employees a few unique benefits they won’t find on their own, though. Before you make up your mind, consider three more reasons to love a Roth, especially inside a company-sponsored plan:
- Expanded eligibility. There are income limits for Roth IRA eligibility that don’t apply to a 401(k) Roth account, so that even high earners can contribute.
- Higher contribution limits. A Roth IRA contribution is limited in 2016 to $5,500 for people under age 50, and $6,500 for those 50 and older. In a Roth 401(k) account, the maximum contribution is $18,000 in 2016 for those under age 50, and $24,000 for those 50 and over.
- Potential for company match. If your company makes a matching contribution, employees can receive it when they contribute to either the traditional 401(k) or the Roth 401(k) account, if the plan is set up to allow that. The matching contribution will always be pre-tax—even if the employee has a Roth account. When they contribute to their personal IRA, they won’t get a match.
If you decide to add a Roth option to your 401(k) plan, talk about it regularly. Make sure employees understand the advantages it offers them. Need a hand? We can help your employees understand your plan and take full advantage of all of its provisions. Get in touch and let’s talk about it.
1Capturing the Opportunity of Roth 401(k) Contributions: What Employees are Missing and How Employers Can Help. Willis Towers Watson, 2016.
2Roth accounts can be included in 403(b) plans too, but for this article we’ll discuss 401(k) plans.