Benefits of Roth 401(k): 5 Reasons Your Employees Will Love it

Do your employees seem to be ignoring the Roth account available in your 401(k) plan? Or, like just under half of all employers, maybe you haven’t added one to your plan yet.¹In either case, it might be time to take a harder look at Roth 401(k)s—and help your employees do the same. Roth accounts provide some distinct advantages for your employees, and can play a substantial role in helping them retire comfortably on their terms.

Roth 401(k) Rules

Roth accounts can be made available to your employees as part of your company-sponsored retirement plan,²or through an Individual Retirement Account (IRA). In a traditional 401(k) or IRA, contributions go into the plan before income taxes are paid. Income taxes are then payable upon withdrawal, typically during retirement.

Roth accounts take the opposite approach. Contributions are made with money that has already been taxed, and no income taxes have to be paid when that money and the interest it has earned is withdrawn at retirement. Having both a Roth account (in which taxes have already been paid) and a traditional account (in which taxes will still have to be paid) during retirement means that you’re drawing income from multiple sources and can keep your level of taxable income lower than with just a traditional account.

Roth 401(k) vs Roth IRA

It’s true employees can seek out a Roth option on their own, through an IRA—but adding a Roth account to your company 401(k) gives employees a few unique benefits they won’t find on their own.

1. Roth IRA vs. 401(k)

There are income limits for Roth IRA eligibility that don’t apply to a 401(k) Roth account, so that even high-earners can contribute.

2. Roth 401(k) Limits Are Higher Than Roth IRA Limits

A Roth IRA contribution is limited in 2024 to $7,000 for people under age 50, and $8,000 for those 50 and older. The maximum contribution for any mix of traditional or Roth savings is $23,000 in 2024 for those under age 50, and $30,500 for those 50 and over. So if your employees wanted to max out their 401(k) contribution for the year, they could split it 50/50 with $9,750 saved pre-tax, and $9,750 saved as Roth contributions.

3. Roth 401(k) With an Employer Match Contribution

If your company makes a matching contribution, employees can receive it when they contribute to either the traditional 401(k) or the Roth 401(k) account, if the plan is set up to allow that. The matching contribution will always be pre-tax—even if the employee has a Roth account.

Roth 401(k) Taxes

Roth accounts are a particularly good way for employees who are just starting their careers. They’re likely in a lower tax bracket, so those employees will contribute money that has already been taxed at a lower rate than they would be later in life with a higher-paying job. Even better, they won’t have to pay income taxes on the Roth account’s investment growth, which could be substantial by the time the saver retires and needs the money.

4. Diversify Your Tax Strategies.

The “Roth vs. traditional” decision isn’t all or nothing. Employees can decide each year whether (and how much) to contribute to the Roth account.

Generally, saving through a Roth is advantageous when your earnings are low—and therefore your tax rate is low—and you expect your tax bracket to be higher later in life, or during retirement.

Your savings strategy should take into account your future income forecast: Utilize a Roth when your tax rate is lower, but consider altering your strategy if you start earning more money and reach a higher tax bracket.

5. In Retirement, Roth Account Withdrawals Mean Lower Taxable Income.

Why would that be an advantage? Because some programs are based upon an individual’s Adjusted Gross Income (AGI)—an algorithm that determines whether certain subsidies are available. Roth income is not included in the AGI calculation, however, which could mean the difference between receiving and not receiving a health care subsidy—which is especially valuable to an early retiree who is not yet eligible for Medicare.

If you decide to add a Roth option to your 401(k) plan, talk about it regularly. Make sure employees understand the advantages it offers them. Need a hand? We can help your employees understand your plan and take full advantage of all of its provisions. Get in touch and let’s talk about it.

¹Capturing the Opportunity of Roth 401(k) Contributions: What Employees are Missing and How Employers Can Help. Willis Towers Watson, 2016.

²Roth accounts can be included in 403(b) plans too, but for this article we’ll discuss 401(k) plans.