“My company just started offering a Roth 401(k). What should I do?” This is a question I receive at least monthly from clients.
Since their invention in 2006, Roth 401(k)s have become more prevalent in employer plans. Having the flexibility to decide whether to contribute to a traditional, pre-tax 401(k) plan or the after-tax option available with a Roth is a benefit to be carefully considered.
It used to be easier. The assumption was that most people would be in a lower tax bracket once they entered retirement, making the traditional, pre-tax option the obvious choice. But as we see in our practice, that is often not the case. If your employer has added a Roth option to your 401(k) plan, do some research and talk to your advisor and accountant.
Here’s what you should know about Roth 401(k)s:
- It’s not either-or: If your plan offers both a traditional and Roth 401(k), you can contribute to one or both options. The contribution limit for both plans in 2019 is $19,000 for those under 50 years old. (50+ can contribute $25,000.)
This means that a 45-year-old could choose to allocate $10,000 to a Roth 401(k) and $9,000 to a traditional 401(k).
- You can contribute to a Roth 401(k) and a Roth IRA at the same time: Roth 401(k) contributions and Roth IRA contributions are totaled separately. This means, for those over 50, as long as you qualify for a Roth IRA, your after-tax contributions could total $25,000 for a Roth 401(k) and $7,000 for a Roth IRA ($6,000 + $1,000 catchup).
- There are no income limits: With a Roth IRA, your ability to contribute is dependent on your income level. However, with an employer-sponsored Roth 401(k), you are automatically eligible to contribute, regardless of salary.
- Choosing the Roth 401(k) won’t change your employer match, but….: Legally, employers can only match contributions in a traditional 401(k) account. If you contribute 3% of your salary to a Roth plan, your employer’s match will be deposited into your traditional 401(k) regardless of how you allocate your portion.
The big question then, is how to decide if or how you should allocate your contributions. This is where it gets a bit trickier as it really depends on your particular situation and how you can make the most of each type of plan. Since there isn’t a one-size-fits-all solution, we would be happy to walk through the pros and cons with you and help you make an evaluation.