Roth 401(k): Your Employees Might Be Missing Out. More employers are offering workers the opportunity to set aside after-tax dollars for retirement in Roth 401(k)s. However, employees aren’t embracing them with quite as much enthusiasm. But they could be missing on some major tax advantages, so it’s worth your while to encourage your employees to take a look at the Roth 401(k) option if your retirement plan offers one.
Citing a forthcoming survey from benefits consulting firm Alight Solutions, a recent article in Consumer Reports pointed out that nearly 80% of employers offer a Roth 401(k). However, only 13% of workers use the Roth option when available.
Bad move. If your employees aren’t using the Roth 401(k), they’re forfeiting a chance to stash post-tax pay, and hedge against the possibility that they may, in fact, be in a higher tax bracket in retirement.
Here’s a quick list of Roth 401(k) advantages:
- An employee can choose to participate in both the traditional 401(k) and the Roth 401(k), and put away both pre-tax and after-tax dollars for retirement. The combined amount can’t be more than $18,000 (the current 401(k) contribution limit for 2017) or $24,000 (for those age 50 and older).
- Like 401(k)s, there are no income limits.
- As an employer, you can also make matching contributions to a participant’s Roth 401(k) account, helping them save even more for retirement.
A recent Harvard study indicates that Roth 401(k) uptake isn’t higher among employees because many are confused by the tax laws. Lack of awareness about the Roth, along with plain old inertia, are also reasons workers skip this after-tax savings option.
However, the Harvard study findings illustrate an obvious need for employee awareness and education around Roth offerings and the tax advantages of both traditional and Roth 401(k)s. Plan sponsors have an opportunity to engage employees by creating campaigns around these topics that are also designed to promote overall awareness of plan benefits and increase participation in both the traditional and Roth 401(k).
Here are three key benefits of Roth 401(k)s that you can include in your education campaigns to entice employees to take advantage of those tax-free savings:
- Their savings will be worth more at retirement: Money goes into a Roth 401(k) after-tax, and the investment growth and withdrawals at retirement are also tax-free. By contrast, employees can reduce their current taxable income by making pre-tax contributions to a traditional 401(k), where their money also grows tax-deferred until retirement. However, they have to pay taxes on it when they take it out at retirement. With the Roth 401(k), workers can access their full balance tax-free. The downside is, it can be harder to fully fund a Roth 401(k) since it’s being done with after-tax money, but the reward at retirement is greater.
- Employees are likely to save more: Roth 401(k) savers contributed an average of 9.7% of pay, 2 percentage points more than the average 401(k) saver, the Alight survey found.
- A Roth 401(k) offers tax diversification: Many workers worry that they’re shooting themselves in the foot by saving in a Roth 401(k). While they’re forfeiting a tax break today for tax-free dollars tomorrow, they’re also betting they’ll be in a higher tax bracket at retirement — but there’s no way to know for sure. There’s a simple solution: participants can save in both the traditional and the Roth 401(k). That way, they’re hedging that bet on their future tax rate and diversifying their tax liabilities. The decision of how much to save where depends on an employee’s specific situation — their age, career phase and overall portfolio.
Finally, it’s worth noting that having the ability to access tax-free money from a Roth 401(k) can help retirees avoid triggering taxes on other benefits like Social Security or healthcare subsidies if they’re not yet eligible for Medicare.
The bottom line: A Roth 401(k) can be a powerful benefit that employees can use to save more for retirement today and reap the tax rewards tomorrow. Sponsors, it’s up to you to spread the word.
