What's the benefit of a Roth 401(k)?July 10, 2012: 5:30 AM ET
I am 31 years old and contribute more than enough to my 401(k) to obtain the company match. I also max out my contribution to a Roth IRA every year. I would like to contribute to a Roth 401(k), but my company does not offer this plan. Can you help me understand the benefits of a Roth 401(k)? Also, do you have any recommendations on selling my company on making a Roth 401(k) option available? — Justin
First, congratulations on such a great start to your retirement savings. Receiving your full company match is one of the best ways to boost your nest egg and contributing to an IRA regularly at a relatively young age will help ensure you have what you need for a comfortable retirement. As for the Roth 401(k), like just about every investment vehicle, there are pros and cons, says Carol Friedhoff, a fee-only certified financial planner and founder of Savvy Outcomes in Dublin, Ohio.
The big bonus with a Roth 401(k) is that you pay no taxes on withdrawals. So if you believe your taxes will be higher in retirement than they are now (a plausible scenario since you are still young and probably in a low tax bracket) the Roth option makes sense. With traditional 401(k)s, withdrawals are taxed at regular income tax rates. That's a plus if you are in a high tax bracket and need the break now and believe your tax rates will decrease in retirement.
It isn't easy to predict where tax rates will be when you retire, warns Friedhoff. Her advice: Hedge your bets by investing in a mix of traditional and Roth investments. In effect, you're already doing this by investing in your company's traditional 401(k) and a Roth IRA.
There are other benefits to a Roth 401(k) or Roth IRA. Withdrawals don't count toward Social Security tax. And a Roth IRA isn't subject to mandatory withdrawals at age 70 and a half.
As for lobbying your employer to start a Roth 401(k), Friedhoff points out that there is no financial incentive for employers to offer this vehicle over a traditional retirement account. And only about 25 percent of employers offer a Roth 401(k). Nonetheless, she says, employers are often under pressure to provide as many good retirement options as possible, so your benefits department may well be interested in hearing your request. "By all means let them know that you would like this option," says Friedhoff. You can also encourage other employees who think the same way to join your lobbying efforts.
— Walecia Konrad
Correction: A previous version of this post erroneously stated that Roth 401(k)s are not subject to required minimum distributions starting at age 70 and a half.
Got a question for the Help Desk? Send it to email@example.com.