A compelling feature of a 401(k) plan has always been the opportunity to contribute money from your current income on a pre-tax basis today, let it work for you over the years - and then pay taxes on the accumulated balance as you withdraw it in the future. That is very attractive to many business owners and their employees. But what if you flipped this process and contributed money to your retirement savings account with post-tax dollars that you invested over time and then had the opportunity to withdraw the accumulated balance tax-free, including the earnings? That's what happens in a Roth account.
Like the original Roth IRA, the Roth 401(k) account has the specific advantage of growing tax-free, but the 401(k) version doesn't have the associated income limits. When we offer a Roth feature in your plan, it's managed as a separate source of money so that contributions, earnings, and distributions are tracked separately from pre-tax sources. Contributing money to a Roth account isn't the right strategy for everyone. Many factors determine its suitability, including your age, your income, what tax bracket you're in, and what tax bracket you may likely be in at retirement. A Roth account tends to be most beneficial if you expect to be in a higher tax bracket when you retire than during those years while you're contributing to your plan.
For example:
- A Roth account can benefit a younger employee looking to jumpstart his/her retirement savings before he/she enters a higher tax bracket later in his/her career.
- It may also benefit a high-income earner who wants to have a cache of tax-free money available in retirement.
- It can also be helpful to a saver who may be close to the required minimum distribution age. Under SECURE 2.0, required minimum distributions are no longer required to be made from Roth balances in 401(k) plans, which means your balance can remain in the qualified plan longer if you wish.
Offering a Roth feature does add responsibilities for you, your advisor, and your recordkeeper to provide greater education and engage with employees by explaining the pros and cons of contributing to a Roth account.
Questions?
We invite you to contact Brad Bechtel using the information below and discuss the details and benefits in establishing a Roth 401(k) account in your plan.
Senior Vice President
Employee Benefit Services
Brad Bechtel leads AGH’s employee benefit services (EBS) division, which serves clients nationwide. EBS is one of the region's largest providers of retirement plan recordkeeping services for daily valuation plans. The division provides consulting services to clients on employee benefit plans, including plan design, implementation, operation, fiduciary due diligence, compliance, and through affiliate AGH Wealth Management, discretionary and non-discretionary investment fiduciary services, investment advisory services and employee education.
Brad is experienced in executive compensation, including non-qualified, phantom stock, top hat and excess benefit plans, as well as other deferred compensation approaches. He has consulted for numerous Fortune 500 corporations on investment management and fiduciary due diligence. He also provides search and selection due diligence consulting services for companies seeking new investment and recordkeeping providers for their qualified plans. Brad is a registered investment advisor who holds Series 7, 24 and 66 FINRA registrations, and he is a member of the American Society of Pension Professionals & Actuaries.
NOTE: Any advice contained in this material is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of avoiding tax penalties that may be imposed by the IRS or states, or promoting, marketing or recommending to another party any transaction or matter addressed herein.