Roth Contributions: An Underused Option that Offers Real Retirement Benefits
Published on by Paige Aicholtz in Benefit Plan Audits
According to the U.S. Bureau of Labor Statistics (BLS), in 2021 more than two-thirds of private companies were offering some form of retirement plan to their employees. One of the most traditional retirement plan options offered is a 401(K) pre-tax plan – and while this is an excellent option to assist in saving for retirement, what’s often overlooked is taking advantage of the Roth 401(K) after-tax option.
More and more companies are starting to offer a Roth 401(K) after-tax option, but as with anything that is not as well documented, plan participants tend to be hesitant to opt-in. A Roth 401(K) can be a great tool to help plan holders save for retirement. Keep reading to learn more about what a Roth 401(K) is and the benefits it can offer.
A Roth 401(K) plan is defined as a post-tax retirement savings account. In the most basic sense, this means that you’re contributing dollars that have already been taxed toward the plan! The upside to this is having the option to withdraw your money on a tax-free basis as your tax-free money accumulates interest over time. To withdraw the money tax-free with no penalties, you must be 59 ½ years old and five years must have passed since your first contribution, or the employee is deemed to have a disability, or on or after their passing.
Starting in 2023, you are now able to contribute $22,500 of your income toward your retirement account. Most participants of retirement plans can split their money between Roth and Traditional 401(K) options. This might be an attractive option as your company may offer a match for pre-tax dollars that you want to take advantage of.
Roth contributions can be an excellent option for many individuals, and now that more and more companies are beginning to offer this option, it may be time to assess your situation to see if you can benefit from a Roth 401(K) after-tax option.
Questions? We can help.
Barnes Dennig is one of the country’s Top 100 firms for employee benefit plan auditing. We are also members of the AICPA Employee Benefit Plan Audit Quality Center, and our Benefit Plan team hones their skills by performing more than 170 plan audits a year, and we’re here to help.
Questions about the 80-120 rule? This short explainer video unpacks it. You can also download your copy of our 2022 401(k) Plan Management Benchmarking study.
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