Many U.S. workers are in a position where they don't have access to a retirement savings plan through an employer. And people in that boat can thankfully fall back on an IRA in the absence of having a 401(k) or a similar employer-sponsored plan.
But there's a big benefit to saving for retirement in a 401(k). Not only do 401(k) plans come with substantially higher contribution limits than IRAs, but many employers have a policy of matching worker contributions to some degree. That's free money for your retirement.
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Meanwhile, many retirement savers opt to put their money into a traditional 401(k). That way, they can shield some income from the IRS.
But if your employer offers a 401(k) with a Roth savings feature, you may want to take advantage of it. Though your contributions won't go in tax-free as they do with a traditional 401(k), you stand to benefit in other ways.
An increasingly available option
In 2013, only 58% of employer 401(k)s offered a Roth version, according to the Plan Sponsor Council of America. In 2022, that number rose to just above 89%.
The fact that more employers are offering up Roth 401(k)s is a good thing, because while you do lose out on that initial tax break with one of these plans, you get the benefit of tax-free investment gains and tax-free withdrawals. And the latter could be huge.
Many seniors find themselves financially stressed in retirement even after building up decent-sized nest eggs. Not having to hand some of that money over to the IRS later in life could help alleviate a host of financial concerns.
Plus, with a Roth 401(k), you don't have to bear the risk of tax code changes that might impact you negatively. We don't know whether tax rates will generally be higher several decades from now. But with a Roth retirement account, that's not a concern of yours, because you won't be paying taxes on your withdrawals either way.
A recent change makes a Roth 401(k) an even better bet
It used to be that savers with money in a Roth 401(k) would eventually be on the hook for required minimum withdrawals (RMDs). But starting in 2024, Roth 401(k)s won't impose RMDs, the same way they don't apply to Roth IRAs. So as a saver, that gives you even more flexibility with your money.
If there's a given year where you don't need to tap your 401(k) -- say, an inheritance comes your way -- you'll have the option to leave your balance intact. That way, it can continue growing tax-free.
Of course, some seniors end up not minding RMDs because they need to tap their savings to cover their bills anyway. But if you happen to land in a position where you don't have to do that, why not keep your money invested?
All told, it's a positive thing that a growing number of employers are offering up Roth 401(k)s. Consider saving in one of these plans if that option is or becomes available to you.
