- GOLD IRA
- Download Our 2023 Precious Metals IRA Investor’s Guide.
- Gold IRA
- CRYPTO IRA
- PRICES & STATS
- RETIREMENT PLANS
- Questions? Call (888) 820 1042
Is a Roth 401(k) A Good Choice For Retirement Planning? – 11 Financial Experts Weigh In
Disclosure: Our content does not constitute financial advice. Speak to your financial advisor. We may earn money from companies reviewed. Learn more
Last Updated on: 9th October 2019, 08:02 pm
Setting aside savings on a monthly basis is crucial for not only building wealth, but for retirement planning. There are numerous types of retirement plans that can help you achieve your retirement goals. In this article, 11 financial experts chime in on whether or not a Roth 401(k) a good choice as a retirement savings vehicle.
A Roth 401k Is An Excellent Savings Vehicle
“A Roth 401k is an excellent savings vehicle for retirement planning. The Roth option allows you to invest in a way that you will not incur any income tax obligation in your earnings. Considering the power of compounding, that is a huge benefit. It’s especially helpful if you are still a long way from retirement. This is the same essential tax treatment as a Roth IRA.
However, a huge difference between a Roth IRA and a Roth 401k is the limit. You can only put $6,000 into a Roth IRA. A Roth 401k has a $19,000 limit. That’s an incredible difference that make a very significant impact on your ability to retire, and your tax bill when you do.
One drawback to a Roth 401k is that you will be subject to required minimum distributions (RMDs) when you reach 70&1/2. That’s not the case in a Roth IRA.
Of course, you can avoid the RMDs by rolling your Roth 401k into a Roth IRA. If you do that, just be aware that any employer matching contributions you received while you were employed are not Roth dollars. Those went into a separate account and will be taxed when withdrawn. You’ll need to roll those amounts into a traditional tax-deferred IRA.”
Brandon Renfro, Professor, Financial Planner
A Roth 401(k) Is A Wonderful Tool
“Although not as flexible at a Roth IRA, a Roth 401(k) is a wonderful tool because it allows you to get up to $25,000 into that important Roth category. The most you can do is $7,000 into a Roth IRA. It's an even
better tool for self-employed individuals who will qualify for the Qualified Business Income (QBI) deduction. When these people put a dollar away in a traditional account, their effective deduction is only 80% of what it otherwise would be because their QBI deduction will be reduced. The QBI deduction is 20%.”
Robert Lindstrom, CFP®, EA, Provision Financial Planning
The IRS Allows The Money In A Roth 401(k) To Grow Tax-Free
“A Roth 401(k) is a fantastic retirement account because you are entitled to 100% of the money inside the account. The IRS allows the money in this account to grow tax-free: the dividends and interest are all tax-free and capital gains (trading) is all tax-free as are the withdrawals. Therefore you can easily adjust your portfolio allocations without any tax implications.
Many other retirement accounts like a Traditional 401(k) or Traditional IRA are called tax-deferred because you still owe taxes on account value and therefore all the money in the account is not yours.”
Mike Morton, Fee-Only Financial Advisor, Morton Financial Advice
Would You Rather Pay Your Tax On The Seed Or On The Harvest?
“Using a Roth 401k in your retirement has its benefits. As opposed to investing with a traditional 401k, all contributions made to a Roth 401k are post-tax. Now that may sound like a negative, however, what it does mean is that any contributions that the employee had during their working time, in addition to any earnings on those contributions, can be withdrawn tax-free! So in essence, they are forgoing the tax benefit they may receive now to have a greater tax benefit in retirement. This can have a huge impact on future planning.
When beginning to save for retirement, one has to consider where they think tax brackets will be in the future. Right now, taxes are at some of their lowest points in history. With that being said, if one were to believe that taxes were only going to go up in the future, would it make sense to defer paying taxes on our retirement contributions or go ahead and pay the tax now? It would make sense to pay taxes now in the lower brackets and withdrawal the money in times of higher brackets tax-favored or tax-free. The contrary can also be said. If someone felt that taxes were only going to go lower, then they should defer paying taxes now and pay them at a lower bracket in the future. However, I do not find many people out there that feel that taxes are going to be lower in the future. This is a great case to make for the Roth 401k.
One of the benefits that this has on future planning is the taxation of Social Security. If a retiree has filed for Social Security retirement benefits, then there are certain income thresholds that are in place to determine if or how much of their Social Security will be taxed. Because Roth IRA/401k distributions are not taxed they do not figure into the provisional income calculation that is used to determine taxation. So in theory, someone that did all of their savings on Roth vehicles and has filed for Social Security, can potentially pay NO tax on their Social Security benefits. This is the power of Roth.
The ultimate question that someone needs to ask themselves is: Would you rather pay your tax on the seed or on the harvest? You have the option to do either, neither or both, but if it were my choice, I would rather pay the tax on the $100 coming out of my paycheck each week as opposed to the $1 million I have saved after 30 years. There is no right or wrong answer for everyone, but everyone that has access to a Roth 401k really should look long and hard at the benefits that are available.”
Gregory J. Kurinec, CFP(r), MRFC, Bentron Financial Group, Inc
Maintain Asset Diversification As Well As Account Diversification
“I recommend that individuals maintain asset diversification as well as account diversification, where individuals utilize the various tax-advantaged accounts that are available to them in order to save for financial goals, such as retirement.
Specifically saving for the financial security goal of retirement requires decades of accumulating savings in order to recreate an income stream once an individual leaves the workforce. And specifically because we cannot predict what future tax rates will be, I believe it is smart to save in a regular taxable brokerage account, a tax-deferred account (like a traditional 401(k) and IRA), as well as a tax-exempt account (like a Roth 401(k) and IRA). This savings strategy can perhaps give an individual more control over the withdrawal process of their assets once they are retired.
Three specific points about a Roth 401(k):
- While there are income restrictions on who can contribute directly to a Roth IRA, there are no such restrictions on a Roth 401(k), so it allows for high-income earners to easily and directly fund a Roth account.
- While the 2019 annual contribution for a Roth IRA is $6,000 ($7,000 for those age 50 and older), an individual can contribute up to $19,000 ($25,000 for those age 50 and older) to a Roth 401(k) for 2019.
- In general, qualified distributions from a traditional 401(k) or IRA are taxed at the current income tax rate at the time of distribution, while qualified distributions from a Roth account (whether 401(k) or IRA) are tax-free. Therefore, for planning purposes, an individual knows exactly how much they have saved in a Roth account, whereas that is not entirely true for their traditional account balances as taxes are still owed on the money.”
Alicia Rose Hudnett, Personal Finance Expert, Financial Planner, Owner, The Business of Your Life
Major Consideration In Retirement Planning Is The Tax Diversification Of Retirement Assets
“A Roth 401(k) certainly can be a good choice as a retirement savings vehicle. A major consideration in retirement planning is the tax diversification of retirement assets. Between taxable, tax-deferred, and tax-free accounts, where is the bulk of your retirement savings? Tax-free accounts offer the most flexibility from a withdrawal and taxation standpoint. A Roth 401(k) can be rolled to a Roth IRA upon retirement so it is not subject to required minimum distributions (RMDs) at age 70 1/2. As long as the Roth IRA has been in force for 5 years, withdrawals are tax-free. This gives you the flexibility to take withdrawals whenever you need or want without any (federal) tax consequences.
If we assume a Roth 401(k) and a Traditional 401(k) have the same balances at retirement, we have to consider the fact that withdrawals are taxed on the traditional, but the tax savings realized now on the pre-tax contributions can also be invested in a taxable account. If those current tax savings are invested in a taxable account for the same period of time and at the same rate of return as the retirement account, can the annual income it generates in retirement make up for the taxes paid on withdrawals from the Traditional? If the answer is yes, than a Traditional is generally going to make more sense than a Roth. If the answer is no, than a Roth might be the better choice. American Funds has a great calculator to help answer this question.”
Chad Rixse, Director of Financial Planning, Wealth Advisor, Forefront Wealth Partners
It Depends On One’s Current Income Tax Rates And Future Tax Rates During Retirement Will Be
“A Roth 401(k) is certainly a great choice in retirement planning. The real answer is that it depends on one’s current income tax rates and future tax rates during retirement will be. Generally speaking, for a younger professional who has decades left until retirement, a Roth 401(k) is hard to go wrong with. You will bite the bullet and pay some income taxes today, and reap the rewards later with 100% of your distributions tax-free at retirement. For someone nearing retirement who expects their income to drop significantly upon retirement, they may be better off deducting taxes today with a traditional 401(k).
Tax diversification is also a real strategy. Allocating your retirement savings towards pre-tax accounts like a traditional 401(k) to lower income taxes today in addition to putting some post-tax dollars away for tax-free growth can provide great flexibility in the future. Nobody has a crystal ball that allows them to know the exact situation they will be in, who is in office, and what future tax rates will be in their retirement years.
Lastly, you can work with a tax or financial planner to help you run projections to determine the appropriate pre and post-tax contributions that will allow for you to minimize current taxes while hedging the risk of higher income tax rates in the future.”
Henry Hoang, Financial Planner and Founder, Bright Wealth Advisors
It Usually Makes Sense To Use Both A Normal 401(k) And The Roth 401(k)
“A normal 401(k) and the Roth 401(k) are some of the most basic and useful retirement tools available. Now the question is, what is the difference between the two?
Traditional: With this account type, your contributions can be tax-deductible. This means that if you make 100K before tax one year, and you contribute $6,000 to a traditional 401(k) and you will then only be taxed on 94K. You would then be able to invest your 401(k) funds into the stock market or other securities and your earnings will not be taxed until the money is taken out of your 401(k). This allows you to potentially accumulate much more earnings over the course of your life leading up to retirement. You are required, however, to start taking some distributions once you turn 70 and 1/2 so that the government can get its fair cut.
Roth: This account, on the other hand, is funded with after-tax money. This means that if you made 100K in a year, you would be taxed on the full 100K and then you could fund your Roth with what is left. The power of this account type occurs when you take distributions out of it. Your entire account balance (contributions and earnings) are tax-free if taken out after you are 59 and 1/2 and there are no minimum distribution requirements at 70 and 1/2.
The question is, which is better? Like always, it depends. It usually makes sense to use both sides. This way, you have flexibility when taking money out. For example, if one year, you have high taxable income, you could take out of your Roth side to keep your tax bill as low as possible. During the years of lower taxable income, you can take out of your normal 401(k).”
Dallen Haws, Financial Advisor, Haws Financial Planning
Contributions To Any Retirement Investment Account Must Take Tax Planning Into Consideration
“A Roth 401(k) is a retirement investment account, made available to employees of sponsoring businesses, where financial contributions are invested after taxes are taken out of a paycheck. Because contributions are essentially taxed going into the account, withdrawals from a Roth 401(k) are tax-free.
Deciding on whether or not a Roth 401(k) account is a good choice for retirement planning depends on the individual. Contributions to any retirement investment account must take tax planning into consideration. But, let’s start with the basics.
As with a Traditional 401(k), a Roth 401(k) is offered by an employer and often includes a match on employee contributions. Most employees consider this free money! If a match is included with starting a Roth 401(k), it should be seriously considered; you could be leaving money on the table if you choose not to open that account.
Additionally, both 401(k) plans give employees the convenience of making contributions drafted directly out of a paycheck. This makes it easier for the investor to plan for retirement knowing that the money is directly invested in the account, according to the desired investment risk.
With the uncertainty of tax rates, there are benefits to having at least some savings in a Roth account. Diversification in your retirement planning can protect qualified distributions out of a Roth 401(k), as long as contributions to that account started more than five years previously, and the investor has reached the age of 59½.
Contrary to Individual Retirement Accounts (IRAs), where the annual contribution limit is $6,000 ($7,000 for investors over 50), the contribution limit for a 401(k) is considerably higher—$19,000 ($25,000 for investors over 50). The ability to invest much more every year is a huge benefit with retirement planning.
There are a few points to consider when contributing to a Roth 401(k), including:
– How close you are to retirement can affect retirement investment strategies.
– If you have dependents, a household income between $20,000 – $50,000 and the earned income tax credit or the additional child tax credit.
– If you expect your income level to change in future years. Ideally, you want to be paying taxes when you are in a lower tax bracket.
– If you are subject to the alternative minimum tax could result in deciding to invest in a Roth 401(k)
There’s never a perfect scenario in every situation; therefore, it’s a good idea to speak with your trusted financial advisor. They will help you weigh out the benefits of opening a Roth 401(k) account with your employer. Be sure to look into any underlying fees in your investment vehicles. Remember, not all investments are created equal, and hidden fees can eat away at your retirement.”
Barry Mione, CEO, SaveDay
A Roth 401k Is An Excellent Choice Especially For Someone Who Is Under The Age Of 45
“We feel a Roth 401k is an excellent choice for a retirement savings vehicle, especially for someone who is under the age of 45 and anticipates working for at least another 10 years. Unlike the Roth IRA, the Roth 401k has no income limit, so the younger participant who is a high earner has access to a Roth vehicle that otherwise wouldn't be available to him or her.
As a person gets closer to retirement, the immediate benefit of tax deductibility of a traditional 401k may mathematically outweigh the long-term benefit of tax-free withdrawal. At that point, a person may want to switch to a traditional, deductible 401k for the last few years of work. Our caveat is always that the person should take what they've saved in taxes and invest that money into something investment related so that the tax savings works even harder. We find most people simply put their tax savings into their general fund and it gets spent on frivolous things.”
Donald Cummings, Blue Haven Capital
The Most Important Thing To Consider With A Roth 401(k) Is Whether You'd Rather Pay Taxes Now Or Later
“Given that the biggest difference between a traditional 401(k) and a Roth 401(k) is when taxes are taken out, the most important thing to consider when deciding whether to use a Roth 401(k) is whether you'd rather pay taxes now or later. Contributing post-tax dollars to a Roth 401(k) gets paying taxes on your savings out of the way. This can also help you to avoid having to pay a higher tax rate by the time retirement rolls around. This can certainly be beneficial since you're unaware of what your income or financial situation will be when you retire, especially if you make more money and advance in your career and therefore end up in a higher tax bracket by that time. Additionally, when it does come time to retire, you'll be withdrawing the sticker price of your Roth 401(k). With a traditional 401(k), you'd only be pocketing a portion of the amount in your account because you'd be paying taxes on it. However, something to consider is that, because your contributions are post-tax, the hit to your paycheck now will seem more significant. You also can't withdraw funds at any time with a Roth 401(k) and need to have held the account for at least five years, even if you've reached age 59 ½.”
Leslie H. Tayne, Author and Financial Attorney, Founder and Director, Tayne Law Group
There are similarities and some key differences between a traditional 401k and a Roth 401k. Depending on the individual, a Roth 401k can be a good vehicle for retirement savings. Before making investment choices, take into account what these experts have discussed here, consult a financial professional, and always do your due diligence.