While the Roth 401(k) resembles the Roth IRA as far as the tax situation, the Roth 401(k) is far more generous when it comes to who can make contributions. If you’re single and making $127,000 or more, or married and making $188,000 or more, you can’t contribute to a Roth IRA. If you’re single making between $112,000 and $127,000 or married making between $178,000 and $188,000 jointly, the amount you can save in the Roth IRA decreases as your income rises. However, there are no income restrictions for contributing to a Roth 401(k). You can also put away more in a Roth 401(k).
Not all employers have added the Roth 401 (k) option to their benefits package. In fact, according to a survey released by human resources consulting firm Aon Hewitt, 49% of respondents do not offer the Roth 401(k) to employees. But of those that don’t, 29% said they were very or somewhat likely to add the option in the next 12 months. If your company offers the Roth 401 (k) option or will be offering it in the near future, it may be worth a second look.
If your company offers the option of choosing between a traditional 401(k) plan and a Roth 401 (k) plan, “It comes down to your perspective on when you would like to pay taxes, and your estimated tax bracket,â€ says Laurie Nordquist, executive vice president and director for Wells Fargo Institutional Retirement and Trust.
You may find the Roth 401(k) option appealing if:
- You’re young or at the beginning of your career. If you expect to make more money in the future, you may do better paying the taxes now.
- You’re worried about having enough for retirement or you don’t want to have your nest egg reduced by a tax bill.
On the other hand, you may stick with the traditional 401(k) if:
- You’re nearing the end of your career, since you’re likely in your prime earning years.
- You think you’ll make less income after you retire.
- You want to lower the amount of money that you’re taxed on today
Regardless of whether you choose to save your money in a Roth 401(k), a traditional 401 (k), or a Roth IRA, the most important thing is for you to save, Nordquist says. “The greatest benefit for both the Roth and the traditional 401(k) is the fact that you’re able to let those dollars accumulate.â€