Key Points
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If your 401(k) offers a Roth option, it’s worth considering it.
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Losing the up-front tax break on contributions may be worth it for the benefits.
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Roth 401(k) perks include tax-free gains, tax-free withdrawals, and no RMDs.
When you enroll in your company’s 401(k) plan, your first priority may be to figure out how much you can afford to contribute. Once you land on that number, you may shift your focus to how your retirement savings are invested.
These are all important decisions to make. But there’s 401(k)-related decision you should be thinking about early on.
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Have you thought about funding a Roth 401(k)?
Many 401(k) plans now offer both a traditional and Roth savings option. And it’s important not to overlook the latter.
As a refresher, with a traditional 401(k), your money goes in on a pre-tax basis. Investment gains are tax-deferred, while withdrawals are taxed.
With a Roth 401(k), you don’t get an up-front tax break on your contributions. But investment gains in a Roth 401(k) are yours to enjoy tax-free. And withdrawals are tax-free as well.
Roth 401(k)s also offer another huge benefit — avoiding required minimum distributions during retirement. That gives you more control over your money.
Now you may be inclined to stick to a traditional 401(k) so you can save money on your contributions. But by forgoing a Roth 401(k), you give up not only the benefits just mentioned, but other less obvious perks.
One thing many people don’t realize is that Social Security benefits can be taxable in retirement at the federal level, and that your total income helps determine whether that’s the case. Roth 401(k) withdrawals don’t count as taxable income, though. So by funding a Roth 401(k), you could end up sparing yourself taxes on your Social Security checks.
Also, higher earners in retirement can be subject to surcharges on their Medicare premiums. But because Roth 401(k) withdrawals don’t count as taxable income, they won’t push you over that threshold, whereas withdrawals from a traditional 401(k) could.
Look at the big picture
Funding a Roth 401(k) isn’t necessarily the right choice for everyone. If you earn a lot of money and are in a very high tax bracket, it may not be the right time to make Roth contributions.
But if your 401(k) offers a Roth option, it’s certainly worth a close look. If you automatically stick with a traditional 401(k), you could end up kicking yourself for it later.
Remember, too, that when it comes to 401(k) contributions, you don’t have to choose between a traditional and Roth account. Splitting your savings between both 401(k) types could give you the best of both worlds — some immediate tax savings on the money you put in, and more flexibility with your money later in life.
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