There’s a reason so many people seek out jobs with employers that offer a 401(k) plan. Saving in one of these retirement accounts can set the stage for a large amount of wealth.
Not only do 401(k) plans come with generous annual contribution limits — $19,500 for savers under the age of 50 and $26,000 for those 50 and over — but they also frequently come with employer matching programs. As such, many 401(k) participants get free money in their accounts year after year.
These days, however, 401(k) plans are becoming increasingly attractive for one big reason — more are offering a Roth savings option. Over the last five years, the percentage of 401(k)s offering a Roth has grown by 30%, reports Fidelity.
Not surprisingly, many savers are taking advantage of the option to open a Roth 401(k). And millennials have been quick to adopt Roth savings plans. Over the past 10 years, the percentage of millennials saving in a Roth 401(k) grew from 10% to 16%.
If your company’s 401(k) comes with a Roth savings option, it pays to sign up for it. Here’s why.
1. You’ll enjoy tax-free investment growth
When you invest in a traditional brokerage account, any capital gains in that account are taxable for the year you realize them. With a traditional 401(k), taxes on those gains are deferred until you take withdrawals. But with a Roth 401(k), you’ll never pay taxes on your gains at all.
Roth 401(k)s are funded with after-tax dollars. So once you get those taxes out of the way, the IRS won’t come after your account for any more money.
2. You won’t pay taxes on distributions in retirement
Many retirees have a hard time budgeting their money and managing their bills on a limited income. The beauty of saving in a Roth 401(k) is that the withdrawals you take in retirement will be yours to enjoy tax-free. That could alleviate a huge burden for you later in life.
If you expect your tax rate to be higher in retirement than it is today, a Roth 401(k) also makes sense. And unlike Roth IRAs, you can earn as much money as you’d like and open a Roth 401(k) — you don’t need to worry about exceeding preset income limits.
Is a Roth 401(k) right for you?
Though not every retirement plan features a Roth savings feature, this option is becoming increasingly available. If your company’s retirement plan offers a Roth version, it pays to think about signing up for it. While you will lose your immediate tax break on your contributions, you’ll ultimately buy yourself a lot more financial flexibility later in life.
In fact, the whole purpose of funding a 401(k) is to set yourself up for a secure retirement. While you may have to give up the near-term savings you’d get from making tax-free contributions to a traditional 401(k), the benefits you’ll reap could help you avoid a world of financial stress by the time your senior years roll around.
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