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Why a Roth 401(k) Could Be Your Ticket to a Secure Retirement

By Maurie Backman – Dec 13, 2021 at 6:36AM

Key Points

  • A growing number of 401(k) plans are offering a Roth savings option.
  • Roth 401(k)s don't offer an immediate tax break, but there are benefits to be reaped later on.
  • Saving in a Roth 401(k) could eliminate some of your financial worries later in life.

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If a Roth 401(k) is on the table for you, it pays to take advantage.

Many people are familiar with employer-sponsored 401(k) plans. And if your company makes one available, you may already be on the road to building yourself a substantial retirement nest egg.

But many savers opt to put their money into a traditional 401(k). Doing so means snagging a tax break on contributions and enjoying tax-deferred investment growth. However, if your 401(k) plan comes with a Roth savings option, it could really pay to take advantage of it.

These days, a growing number of 401(k)s come with a Roth version. If you go this route, you'll forgo a tax break on the money you put in. However, investment gains in your account will be yours to enjoy tax-free, and you won't pay taxes on withdrawals during retirement. In fact, if your goal is to avoid financial stress later in life, a Roth 401(k) could be really be the right way to go.

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The upside of a Roth 401(k)

Losing out on an immediate tax break might make it more difficult to consistently fund your retirement savings. But if you're able to make that sacrifice, you could benefit substantially once your time in the workforce comes to an end.

Many seniors struggle with taxes once they retire and move over to a fixed income. And the fact that even Social Security benefits can be subject to taxes doesn't help matters. By saving in a Roth 401(k), you'll eliminate one tax source, sparing you that burden at a time when your options for generating extra money to cope with rising living costs may be more limited.

Furthermore, many savers will end up on the hook for required minimum distributions, or RMDs, beginning at age 72. RMDs force you to remove a portion of your retirement savings each year or otherwise face costly penalties. The sum of money you'll have to withdraw will hinge on your account balance and life expectancy, but it could end up being substantial.

If you house your retirement savings in a Roth 401(k), the money you remove in RMD form won't create a tax liability for you. But if you keep your money in a traditional 401(k), the IRS will get a chunk of your RMDs no matter what -- you'll either pay a penalty for not taking yours, or you'll lose a portion of your withdrawals to taxes.

Finally, when you save in a Roth 401(k), you eliminate the risk of rising tax rates. We don't know what tax code changes will come down the pike, but it could end up being the case that tax rates rise across the board in the future. If you keep your money in a Roth 401(k), a tax increase right before retirement won't hurt you as far as your savings go.

The financial security you need

Many people approach retirement filled with financial concerns. If you want to eliminate one potential source of stress during retirement, then it pays to keep your savings in a Roth 401(k) if your employer's plan offers that option. And if it doesn't, talk to your company about finding a way to introduce it.

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