It’s a great option if it happens to be available to you.
The start of a new year is a great time to pledge to better your long-term financial picture. And that might include signing up for a retirement plan.
Now in that regard, you have choices. Anyone with earned income can open an IRA. But if your employer offers a 401(k) plan, signing up could mean easy contributions (since they’re deducted from your pay automatically) and a potential company match. That’s free money for your future self.
Now as is the case with IRAs, 401(k) plans come in both traditional and Roth varieties. And not every 401(k) has a Roth feature. But if that option is available to you, it pays to choose it for these reasons.
1. You won’t be forced to take distributions as a retiree
Roth 401(k)s used to impose required minimum distributions like traditional IRAs and 401(k) plans. This means you’d be forced to start withdrawing from your account at a certain point in time.
But effective this year, Roth 401(k)s no longer have that requirement. So if you put your savings into a Roth 401(k), you’ll be able to leave your balance intact as long as you want to.
2. You won’t have to worry about earning too much
Roth IRAs are subject to income limits, so higher earners can’t fund one of these accounts directly. Now this doesn’t automatically mean a Roth IRA is off the table if you earn a high salary. It’s possible to put money into a traditional IRA and convert it to a Roth afterward. But that’s certainly not the most seamless way to go about things.
With a Roth 401(k), it doesn’t matter how much you earn. There are no income limits to worry about.
3. You can contribute more than with a Roth IRA
Roth IRAs (and IRAs in general) max out this year at $7,000 for savers under the age of 50 and $8,000 for those 50 and over. Now that may not be a problem if you’re new to saving for retirement and aren’t looking to part with much money this year.
But if you’re a higher earner and are looking to pump a lot of money into a retirement plan, a Roth 401(k) is a great bet. That’s because Roth 401(k)s (as well as traditional ones) max out this year at a whopping $23,000 for savers under age 50 and $30,500 for those 50 and older.
What if a Roth 401(k) isn’t available to you?
Employers have increasingly been offering a Roth version in their 401(k)s. If yours doesn’t, and you want the benefits of a Roth account, like tax-free investment gains and withdrawals, then one strategy you may want to adopt is contributing enough to your employer’s traditional 401(k) to snag your full company match, but then putting your remaining savings into a Roth IRA.
This way, you won’t be passing up free money from your employer. But you’ll also get to enjoy the benefits of a Roth account, including not having to take required minimum distributions in retirement if you’d rather leave your money alone.