Are You Missing Out on the Roth 401(k)?

Are You Missing Out on the Roth 401(k)?

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Flexibility Before retirement. Unlike a traditional 401(k) plan, there’s no penalty for withdrawals from a Roth 401(k), as long as you take back only the amount of your original contribution and leave any earnings in the 401(k). That can make a Roth account valuable in emergencies or if you retire early.

A higher savings limit. Workers under age 50 can save up to $18,000 in a 401(k) account every year. Past age 50, they can save an extra $6,000. Those limits are the same for Roth and traditional accounts, but any after-tax dollars put in a Roth go farther, because you still owe taxes on any money put in a traditional account. That makes Roth plans a nice option for workers who want to put as much money in their retirement accounts as possible.

Employer Match Formulas. If you use a Roth 401(k) and your employer matches your contributions, you get automatic diversification between Roth and traditional accounts. Employer contributions are treated as pre-tax traditional 401(k) assets.

In the future, Roths may offer even greater advantages, should the income tax burden on seniors increase. The higher the income taxes on retirees, the more benefit a Roth account provides; the lower they are, the more a traditional plan makes sense. Of course, the uncertainty about future tax rates is also a good argument for hedging your bets by using a mix of both Roth and traditional accounts.