Retirement savers, listen up: more employers are now including a Roth savings option in their workplace 401(k) plans. Thanks to some legislative changes, even those employers who haven’t yet added this feature are likely to do so soon.
According to the Plan Sponsor Council of America, a trade group for employers, around 93% of 401(k) plans included a Roth account in 2023. This statistic, from a survey conducted in December, shows an increase from 89% in 2022 and a notable jump from 62% a decade ago. The survey gathered data from over 700 employers of various sizes offering 401(k) plans.
Let’s explore the difference between Roth and pretax 401(k) savings. Roth accounts affect how your retirement savings are taxed. When you contribute to a Roth account, you pay taxes on those contributions upfront. The upside? Typically, you won’t owe taxes on withdrawals later.
Contrastingly, traditional 401(k) contributions are made on a pretax basis. This gives savers a tax break at the time of contribution, deferring taxes on earnings until withdrawals are made. Despite the rise of Roth options, many employees aren’t leveraging them. The Plan Sponsor Council of America reports only about 21% of eligible workers contributed to a Roth in 2023, while 74% stuck with pretax contributions.
Deciding between Roth or pretax contributions? It’s a choice largely influenced by your current tax bracket and predictions about future tax rates. As financial advisors often suggest, aim for the option that minimizes your overall tax burden—essentially placing a bet on taxes.
This involves some informed guessing. For instance, Roth accounts are generally beneficial for those early in their careers when tax rates might be lower than what they’ll face later on with higher salaries. Financial experts frequently recommend Roths to younger professionals for this reason. As Olga Ismail, head of retirement plans consulting at Provenance Wealth Advisors, says, “We always advise Roth for those in lower salary brackets—typically younger workers. It’s the lowest tax bracket they’ll ever be in, so why not seize the opportunity?”
A Roth 401(k) also offers some unique savings benefits. While Roth IRAs have lower annual contribution limits and income caps for eligibility, 401(k) plans don’t have these income restrictions. This allows high earners direct access to a Roth account and lets everyone contribute more to a Roth than they might otherwise be able to.
Financial strategists also advocate for a mix of pretax and Roth savings, offering tax flexibility when it’s time to retire. For example, pulling funds from a Roth could help retirees avoid higher premiums for Medicare Parts B and D, since these withdrawals aren’t included in taxable income.
Moreover, many assume their tax rates will drop upon retiring—but that’s not a given.
Expect more widespread adoption of Roth 401(k)s soon. A 2022 law known as Secure 2.0 mandates that those making “catch-up” contributions to 401(k)s, whose incomes exceed $145,000, must contribute these extra savings to Roth accounts beginning in 2026. For individuals aged 50 or older with high earnings, nearly all 401(k) plans will need to include Roth options, as Ismail pointed out.
For 2024, workers can contribute up to $23,000 to a 401(k), with an additional $7,500 available for those aged 50 and older as catch-up contributions.
Hattie Greenan, research director at the PSCA, observed that offering Roth options has become best practice in recent years. Due to the upcoming mandate for high earners, she expects Roth features to become even more widespread.
Secure 2.0 also lets companies offer 401(k) contributions as Roth savings, such as employer matches. About 13% of employers plan to definitely add this feature, and 35% are still deliberating, according to PSCA data.
