The New Roth 401k - Better Than a Traditional 401k?

When you think about taxes, do you anticipate tax rates to increase during your lifetime? Most assuredly the answer is a resounding “yes”. For retirement saving alternatives, there is a new kid in town poised to potentially help with the impending tax horizon. A Roth 401(k) is a new option for retirement planning that is worthy of consideration. In this article, we discuss the details and benefits of using a Roth 401(k)s as part of your comprehensive retirement strategy .

Roth 401k

Like the Roth IRA, the Roth 401(k) is a new retirement tool built on a simple concept. Set aside after-tax dollars for tomorrow and help minimize future tax bills. A traditional 401(k) plan offers employees the ability to invest “pre-tax” dollars, with taxes paid at the time of a withdrawal. Traditional 401(k) accounts with a large balance may necessitate large required minimal distribution (RMD) during retirement. The larger distribution potentially propels you and your total retirement income into a higher tax bracket. Calculation of annual RMDs involve two important variables: the year-end dollar value of the account and your age. “After tax” dollars fund a Roth 401(k). During retirement, the key advantage of a Roth 401(k) is, the entire account is tax free! A second major benefit of the Roth 401(k)? A Roth 401(k) has no requirement for annual minimum distributions, helping provide better control of your retirement tax burden.

According to the Wall Street Journal, “Thousands of companies have added Roth 401(k)s to their retirement plans…designed to give workers more flexibility in retirement saving. Putting money into Roth 401(k)s could give savers more spending money, and lighter tax burdens, in old age.”

Open to High Earners – Roth IRA vs Roth 401k

One downside of the Roth IRA is the high-income exclusion feature. High-income earners beyond a certain threshold are not eligible to contribute to a Roth IRA. Conversely, Roth 401(k)s are open to all participants across the income spectrum, including those high earners typically excluded from contributing to a Roth IRA. To learn about ways to contribute to a Roth IRA using a Backdoor Roth conversion strategy, click here for our recent article on using a Backdoor Roth.

Troy Brewer of ClearPlan Wealth Management adds, “Putting a portion of 401(k) savings into a Roth 401(k) adds another retirement plan option, especially if the client is not sure of future tax rates. The additional availability of a tax-free account in retirement, such as a Roth 401(k), offers big benefits!”

Supplemental Income in Retirement

Diversification is always a solid strategy when investing. The placing of just 10% of savings into a Roth 401(k) helps to supplement retirement income, especially during those years that may bring higher healthcare costs or even a higher tax bracket. At the age when required minimum distributions (RMDs) begin from traditional pre-tax vehicles, many retirees are surprised to find themselves in the same pre-retirement tax bracket, not a lower one.

With the upcoming expiration of the TCJA Act proposed for the end of 2025, many retirees could potentially shift from a 22% or 24% tax bracket up to a 28% bracket. As we all know, the future is very uncertain as to what lies ahead in the tax arena. Having a useful tool available to invest after-tax contributions, especially one that accumulates tax-free growth, is a major advantage in the realm of strategic tax planning. As always, we recommend consulting with a tax advisor or tax accountant to analyze your individual circumstances.

Maximizing Wealth Building & Legacy Opportunities

For many, a key goal to build wealth is the maximization of savings and the accumulation of a large nest egg for retirement. Having a degree of control over your tax bill is beneficial. The less taxes you pay, the more money you keep. Roth 401(k)s offer you a “tax free” savings option to help control the taxes you pay.

There are additional Roth 401(k) benefits to consider, including:

• No annual Required Minimum Distributions (RMDs), allowing you to pass the 401(k) on to heirs
• Ability to protect your spouse from the widow’s tax, by providing more tax-free Roth money to spend, without inflating taxable income
• Maximizing your savings and investment capability as a Roth 401(k) allows you to potentially accrue more wealth with a Roth than a traditional 401(k)

Roth 401(k)s are another tool for building a sound retirement investment portfolio. ClearPlan Wealth Management encourages use of Roth 401(k) plan contributions to potentially help maximize retirement savings and minimize future tax burden.

How To Know if a Roth 401(k) Is Right for You?

Every client situation is unique, and it is important to have a thorough understanding of your individual situation and circumstances. Collaborate with your trusted financial advisor to conduct a thorough analysis and develop your overall financial plan. The discussion should include your current portfolio, risk tolerance, retirement vision, timeline horizon, philanthropic wishes, and aspirations for your legacy. Tax laws often change year to year, so it’s also important to team up with a proactive, knowledgeable financial advisor and tax accountant team. By adapting and pivoting to changes that may affect your plan, you may avoid additional taxes and keep hard-earned assets in your pocket.

Don’t Wait – Talk with ClearPlan Today

The reason? We care about you and your financial future. Many financial advisors devote effort to building a client base with minimal retooling or realignment of client plans based on changes in circumstances or the markets. At ClearPlan, our goal is simple. We focus on you, offering value, connecting you with beneficial resources, and serving as your trusted guide. We stand ready to partner together with you, your trusted estate and tax professionals, and your family members, to offer individualized strategies designed to fit your unique circumstances.

We enjoy helping connect people by serving as a trusted financial advisory firm for individuals, business leaders, and multigenerational families alike. Contact ClearPlan Wealth Management today to find out how we partner with you using a proactive, thoughtful, and tailored approach to create your financial roadmap.

ABOUT THE AUTHOR:

Troy Brewer has a talent for connecting successful people while serving as a respected mentor on the path to prosperity. By facilitating an all-encompassing approach to wealth management, Troy utilizes his extensive network of resources including estate planners, accountants, and business leaders to develop creative financial solutions for his clients. By fostering meaningful relationships, orchestrating financial strategies, and serving as a trusted confidant, Troy helps his clients achieve their desired life and legacy.

Troy has spent more than 25 years in the financial services industry, focusing on maintaining tight multigenerational relationships through a process-driven approach. As a Chartered Retirement Plans Specialist® and member of the Baltimore Estate Planning Council, Troy specializes in low-cost investments, complex / multigenerational wealth planning and tax efficiency. His clients include business owners, corporate executives, and affluent families. Learn more about Troy or schedule a consultation.

Opinions expressed in this article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and subject to change without notice. Investing involves risk and you may incur profit or loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. The information contained in this article does not purport to be a complete description of the securities, markets, or developments referred to in this material. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.