Roth 401(k) Knowledgebase
Reasons to Consider the Roth 401(k)
Reason #1: Your Tax Rate During Retirement will be Higher than Today
Reason #2: Roth 401(k) Diversifies Future Tax Risk
Prudent investing dictates that one should diversify investments in accounts or investment vehicles that are taxed differently (taxable, tax-deferred, tax-free). The Roth 401(k) provides a very attractive alternative to tax-free investing as compared to traditional tax-free investments such as tax-free bonds.
Reason #3: Roth IRAs are Not Subject to Required Minimum Distributions
This may have the greatest appeal to business owners and other individuals who have substantial savings. If an individual plans to leave substantial assets to his heirs other than a spouse, it is generally recommended that these individuals defer commencement of distributions until minimum distributions are required. The participant may designate a younger spouse or nonspousal beneficiaries to “stretch” the tax-deferred payments over a longer period to mitigate the impact of taxation. The Roth IRA provides an opportunity to “super stretch” payments since no minimum distributions are required.
Reason #4: Roth 401(k) is Advantageous for HCEs Limited by 401(k) Test
HCE contributions are oftentimes limited if a plan is in danger of failing the 401(k) nondiscrimination test (the “ADP Test”). Affected HCEs can get more “bang for the buck” by contributing the maximum dollar amount permitted under the test to a Roth account on an after-tax basis instead of to the pre-tax. The Roth contribution effectively equates to a higher pre-tax contribution.
Reason #5: Roth 401(k) Contributions Maximize Retirement Benefits
If the participant desires and has the ability to maximize contributions to a qualified retirement plan, the Roth permits the participant to accumulate a greater retirement benefit.
Reason #6: Roth Facilitates Prepayment of Income Tax for Estate Planning
By paying income tax now on the Roth 401(k) contributions, the participant effectively prepays federal income tax on money that passes to heirs without impacting gift or estate tax exemptions.
Reason #7: The Roth Option Promotes Saving More for Retirement
Contributing the same dollar amount to an after-tax Roth account as you would to a pre-tax account increases the amount you save. We all like to save taxes but very few of us save the dollars resulting from the tax deduction.
The Roth option provides the “psychological push" most of us need to help us save more for retirement.
Others Reasons for considering the Roth option may include...
A desire to receive tax-free income during retirement to mitigate the possibility of taxing Social Security payments;
The belief that future tax rates will be higher for all; and lastly (for no objective reason whatsoever)...
A desire to receive tax-free income during retirement.