'Consider Yourself Lucky' if You Can Use This Retirement Account, Says Financial Advisor

Many workplaces offer a Roth 401(k) option, but most workers aren't taking advantage. Here's why that's worth reconsidering.


If you’re saving for retirement at work, one smart move can make your balance even stronger. Invest at least some of your cash in a Roth 401(k).

More than 8 in 10 employers now offer two kinds of 401(k)s to choose from, according to a Callan Institute 2019 Defined Contribution Trends report: a traditional 401(k) and a Roth 401(k). Most savers use the traditional options, but the Roth can be the smarter choice over the long term.

“If you can save in a Roth 401(k), consider yourself lucky,” says John Iammarino, a financial advisor at Securus Financial in San Diego. “My message is Roth all day, every day, if you can.”

Here’s what you need to know as you strategize.

Tax treatment is the big difference

With a traditional 401(k), your contributions come with an up-front tax break. Every dollar you contribute is deducted from your income, reducing your current-year tax bill. You then pay tax in retirement, when money you withdraw will be taxed as ordinary income.

A Roth 401(k) front loads your tax bill. You pay tax today by making your contributions from salary that is first run through the tax-collection machine. The happy ending here is that in retirement you will not owe any tax on money you withdraw.

So if you hit retirement with $500,000 in a Roth 401(k), you have $500,000 to spend. If you have $500,000 saved in a traditional 401(k), you might have around $400,000 or so to use after paying tax, based on current tax rates (which, by the way, are quite low).

A Roth works best as a long-term play

Younger workers stand to benefit the most from using a Roth 401(k).

“Putting away money today that can then grow tax free for decades is so valuable,” says Skip Johnson, a founding partner at Great Waters Financial, an advisory firm with offices across the Minneapolis region.

If you’re not at peak earning level yet, you are likely in a lower tax bracket now than you will be at retirement. Plus federal income tax rates are near historic lows.

“We like to show clients a historical chart of tax rates,” says Johnson. “Then they get it when we say, ‘My goodness, taxes are on sale right now, so let’s take advantage by using a Roth.’”

You’ll have to opt in

Many employers automatically enroll new employees in a retirement plan. But a quirk of auto enrollment is that it plunks workers into the traditional 401(k), even when a Roth 401(k) is an option.

If you habitually ignore the annual open enrollment missives from HR, you likely missed the news that you can choose a Roth.

No worries. Now you know. It’s easy to ping HR and request that some or all of your future contributions be made into a Roth 401(k) account. And make a mental note right now that every time you start a new job you will check to see if there’s a Roth option.

Expect to pay some taxes

Even if you go all in with a Roth 401(k), you will likely still have money in a traditional 401(k). That’s because employers that make a matching contribution typically insist their money goes into a traditional 401(k) account in your name. Yes, you will have to pay tax on that money, but owing some tax on what was essentially a gift of money is a small price to pay.

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