Roth 401(k) contributions are now offered in 86% of retirement plans, including 401(k)s. Through these contributions, participants have the chance to receive tax-free growth on their investments. For all these benefits, just 18% of investors who qualify for this option take advantage of it. The difference begs the question of whether investors are aware of and understand the benefits Roth contributions can provide.
Unlike other retirement contributions, Roth contributions are made with after-tax dollars, so the balance grows tax-free. This feature makes Roth 401(k)s especially attractive for those expecting to pay higher taxes in retirement. The original account owner benefits from not facing required minimum distributions (RMDs), offering greater flexibility in managing retirement funds.
Demographic data shows that the youngest and highest-income investors are most likely to take advantage of Roth 401(k) contributions. We suspect this trend is at least partly driven by increased understanding of the value of tax-free growth. Roth contributions increased marginally from 17% in 2023 to 18% in 2024. Experts are quick to caution that this number is sorely inadequate given the powerful benefits it provides.
“I don’t know that people understand the benefits of the tax-free growth.” – Jordan Whitledge
This is because most workplace retirement plans do provide Roth 401(k) options for employee deferrals. Yet, most workers are still unaware of how these contributions are different from traditional after-tax contributions. Locking in today’s tax rates down the line is a very prudent step for anyone approaching retirement age. It protects them from having to pay potentially much higher rates down the line.
Financial professionals recommend people focus on their big picture tax plan when determining if a Roth 401(k) makes sense. Central Florida financial advisor Mike Casey says it’s key to compare where your tax bracket is now to where you’ll be in the future.
“Many financial advisors recommend a mix if possible, but prioritizing based on your current tax bracket and expected future rates.” – Mike Casey
The benefits extend beyond individual contributors. Some beneficiaries of Roth 401(k) accounts are still subject to the “10-year rule.” This rule is that they have to withdraw all assets from the account within a ten-year period following the original account holder’s death. This strange requirement can have significant effects on estate planning strategies as well as on beneficiaries’ financial decisions and outcomes.
The growing popularity of Roth contributions indicates a promising change in investor behavior when it comes to planning for retirement. Experts are pushing for greater education and awareness around this potentially life-saving feature. Many retirement plan providers offer resources and counseling to help employees understand their options better.