Did You Know About the Roth 401(k) Savings Option?

Your typical 401(k) plan offers strong motivation for participation: saving your money, matched by your employer (at some level), with pretax contributions. You do not pay taxes on the contributions you make to the account, but you will pay taxes upon withdrawal.

A Roth 401(k)—like the more familiar Roth IRA account—is an after-tax account. In other words, workers pay taxes on their contributions to the account but can later withdraw their savings free of tax.

The Roth 401(k) option is becoming more popular with employers. According to one survey, 86% of employers offered this savings program in 2020, compared with only 49% in 2010. Furthermore, about 91% of 401(k) plans offered by large employers (>5,000 workers) had a Roth 401(k) option.

The main benefit of a Roth 401(k) plan goes back to the question of whether you will be in a higher or lower tax bracket once retired. This makes sense, because if your tax bracket is lower today, then you will pay less tax overall now than if you withdrew the savings after retirement. This would often apply to young people, who will likely earn more money in later years. It is not always the case, however. Based on their limited earnings, a retiree may well be in a lower tax bracket. That is the assumption most make when starting a conventional IRA or 401(k) account.

The Roth 401(k) offers a unique rollover benefit: If a person rolls their Roth 401(k) savings into a Roth IRA, federal rules allow that the account owner does not have to begin minimum withdrawals at age 72, even if the money is not needed.

Furthermore, savings in a Roth account can be used to pay Medicare Part B premiums, which are based on taxable income. Unlike a Roth IRA, there is no income limit in order to contribute to a Roth 401(k) plan.

One big disadvantage to the Roth 401(k) plan is that employers cannot match contributions as a post-tax benefit. Matching contributions can only be made in pre-tax plans like a conventional 401(k). However, individuals can contribute up to $20,500 for 2022 in their Roth plan, the same as the conventional 401(k) plan, but far more than the $6,000 limit in a Roth IRA. In addition, those aged 50 and above can add another $6,500 per year as a “catch-up” contribution.

It is important to know these differences. Isakov Planning Group can help individuals, self-employed, business owners, and their staff decide on the best 401(k) program and implement it for them.

Let us help you understand the ins and outs of the Roth 401(k) plan and whether it is right for you. Contact Isakov Planning Group today to learn more.

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