To Roth or Not to Roth?

One of our financial wellness clients recently started offering a Roth 401(K) to their employees. Subsequently, I received numerous emails with questions about the new Roth option.

To set a baseline, the primary benefit of a Roth account is the ability to contribute after-tax money and not pay taxes when you withdraw. Traditional retirement accounts use pre-tax funds, which means you have to pay taxes later when you withdraw.

Roth IRA contributions in 2023 are limited to $6,500 a year (or if you're 50 or older, $7,500/yr), assuming you're below the income limits. With the Roth 401(k), the contribution limit in 2023 is $22,500, (or if you're 50 or older, $30,000/yr). If your employer offers the Roth 401(k) option, you can take full advantage (no income limits).

So, should you contribute to a Roth 401(k)? While the answer is "it depends," here are a few things I like about the Roth 401(k) (and IRA):

• It’s forced savings. The Roth will mean less money in your paycheck because it’s after-tax contributions. While that stinks, it forces you to save. You can adjust your spending today and reap enormous benefits at retirement (e.g., no taxes).
• It’s easier to plan your retirement. All the money in a Roth account is yours. You don’t need to run fancy scenarios on how much tax you may owe – you already paid it. As you start to build your dream life, it’s significantly easier when you already know the numbers.
• No Required Minimum Distributions (for Roth IRAs). Because you've already paid taxes on your contributions, Uncle Sam won't bug you to pay up like he will with your traditional retirement accounts. That means no RMDs! And even better, starting in 2024, RMDs will no longer be required on Roth 401(k) accounts.

Most planners ask you to compare your current tax bracket with your expected future tax bracket as you decide between Roth and Traditional retirement accounts. While they are right, it’s impossible (and stressful) to predict the future…especially as it relates to the government. I say focus on what’s in your control, pay taxes now, adjust your budget, and have a nest egg that is truly yours at retirement.

Does your employer offer a Roth 401(k)? What are your thoughts on Roth vs. Traditional retirement accounts?