You may have heard about a relatively new 401(k) savings option with the advantages of a Roth IRA, but maybe you figured you'd never get the opportunity to use it yourself. A new survey by The Profit Sharing/401(k) Council of America shows that more employers have started catching on.
Right now, 22% of 401(k) plans offer the opportunity to set aside some of your savings in a Roth 401(k) account. Among those who don't, 69% said they may be more likely to now that there is permanent legal authorization for that type of savings plan.
If you have no earthly idea what I'm talking about, here's what you need to know. In a typical 401(k) plan, you (the worker toiling away in your cubicle) can elect to put aside some of your money for retirement before paying tax.
Under the new Roth 401(k) option, you can elect to pay tax first, then put away your money for retirement. This makes the universe of 401(k) retirement savings plans more akin to IRAs, where many savers can choose whether they want to pay tax now or pay tax later.
You might want to elect a Roth option for a couple of reasons. An analysis by the Vanguard Group says a Roth 401(k) can be advantageous for anyone who saves the maximum allowed each year. Those folks can effectively stuff more money away for retirement because they'll never use those resources for paying taxes. As long as you follow the rules, all of the money and its earnings remain yours.
If you expect to be in the same or a higher tax bracket in retirement, you might also want to look into a Roth 401(k). By paying taxes now, you lock in a lower rate than you might pay in the future. This definitely may be you if you're a younger worker not earning a whole lot right now.
If you're decades from retirement, there might be a lot of uncertainty in your mind about your tax rates and the future of taxation in general. In that case, a Roth 401(k) can give you a measure of what Vanguard called tax diversification. Even if you face higher future taxes on your other retirement investments, you'll avoid taxes on anything saved in a Roth-styled account. You can thereby balance future higher taxes with your other untaxed savings.
If you think your small employer will never catch on to this idea, the council's survey found some interesting trends. Smaller companies have been quicker to catch on to the Roth idea, and more of them have added the option to their plans. Larger companies have concerns about the amount of education they'll have to offer employees to bring them up to speed if they offer a Roth savings option.
If you're a Foolish saver hoping your employer will decide to offer a Roth 401(k) savings option, don't just hang around at the watercooler complaining to your coworkers. Let your company know there's interest. If the human resources folks don't hear from you and others, they may not know that employees have an interest in the accounts.
Talk to your benefits department about changes you'd like to see in the plan. Your companies may welcome your input if it feels that the change may be popular with employees. Fill out your argument with some important facts, like the fact that the authorization for Roth 401(k)s is no longer scheduled to run out at the end of the decade.
Get other coworkers involved, too. That can prove that there's interest beyond one persistent Fool bugging the overworked human resources department every day. Have a little patience. It will take some time for companies to adopt the change, advertise it to employees, and work it into their benefits system.
For related Foolishness:
For a wealth of tips about saving money, go to Motley Fool Green Light, the Fool's new personal finance service.