The biggest benefit a Roth account offers is that all your earnings and your initial investment are forever free from taxation if withdrawn in retirement and after at least five years after the account was started. Furthermore, younger workers have a long investment time horizon. This makes the loss of an up-front tax deduction less of a sacrifice and easier to live without. Most younger workers are well-suited to a Roth 401(k) account because they’re early in their career and still in a low tax bracket. Let’s review the tax advantages offered by a Roth 401(k) account and those who should seriously consider switching to a Roth 401(k) account. The fact that so few take advantage means for many it’s time to revisit this issue. Whatever the reason, experts agree that saving in a Roth account is likely better for many 401(k) participants today. Others are skeptics and believe it’s safer to capture some form of tax break today, no matter how small, than to wait for one that is promised down the road, no matter how potentially large. Some mistakenly think because there are income limits on those who can contribute to a Roth IRA, those same limits apply to a Roth 401(k). Over the years, we’ve heard all kinds of reasons why people don’t use Roth. But for many, waiting to collect the meaningfully larger tax benefits of Roth in retirement should lead to a better outcome. This in the face of overwhelming evidence of the benefits of Roth for certain types of savers.Ĭlearly, foregoing an up-front tax deduction goes against everything we’re taught in Financial Planning 101. Today, how one works is still a mystery to most and only 11% of those eligible use one, according to Vanguard’s How America Saves 2019 edition. The Roth 401(k) account was first made available nearly 15 years ago.
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