Roth 401(k)s remain underused, despite the growing number of companies offering them to employees. Experts say that almost everybody should contribute to these after-tax retirement accounts.

Eight in 10 retirement plans administered by Vanguard offered a Roth option as of the end of 2022, yet only 17% of participants in such plans took advantage of it.
Roth accounts were thrust into the spotlight last month, when the Internal Revenue Service delayed by two years a requirement that higher earners make age-related “catch-up” contributions entirely in post-tax dollars. Roth retirement contributions are taxed on the way in, but withdrawals made in retirement are generally tax-free, whereas traditional retirement account contributions are tax-free on the way in, but taxed when withdrawn in retirement.

Workers age 50 and over are allowed an annual catch-up contribution; for 2023, the amount is up to $7,500 above the $22,500 cap on 401(k) contributions. Starting in 2026, the catch-up contributions must be made to after-tax Roth 401(k) accounts instead of traditional tax-deferred 401(k)s. In short, the government is making supersavers pay more in taxes now, while trimming their tax bill in retirement.

Roth accounts are usually considered a good option for young people still in a low tax bracket. Older workers in their peak earning years benefit more from tax-deferred contributions to traditional retirement accounts, prevailing wisdom holds.

Yet it isn’t quite that black and white, some experts say. Many high earners who save a lot in their traditional retirement accounts will still be in a high tax bracket in retirement. They may come out ahead by paying the piper early and reducing their required minimum distributions from tax-deferred accounts in retirement. These required distributions, which currently start at age 73, can push them both into a higher tax bracket and into a higher tier of Medicare Part B and Part D premiums.

Having some of your savings in after-tax Roth dollars gives you more flexibility, experts say. As long as certain conditions are met, Roth withdrawals don’t count toward your taxable income. Tapping after-tax dollars to help meet your living expenses may allow you to stay in a lower tax bracket and avoid paying the higher Medicare Part B and D premiums required of a single person making more than $97,000. What’s more, Roth accounts, unlike traditional 401(k)s, can generally be passed on to beneficiaries free of taxes.

So how much should you contribute to a Roth? You don’t have to project your future income or guess about future tax rates to figure it out. While individual cases can differ, David Merrell, founder of TBH Advisors in Brentwood, Tenn., offers this general rule: If you don’t need to maximize your current income, make post-tax contributions. If you need to squeeze every penny from your paycheck, then it makes sense to take the tax break on traditional retirement account contributions.

David Brown, an associate professor of finance at the University of Arizona, came up with a general formula for people of all income levels: Add 20 to your age and put that percentage toward your traditional retirement account, with the rest toward a Roth. For example, a 40-year-old could contribute 60% to a traditional retirement account and 40% to a Roth.

The exact split matters less than socking away some post-tax money, Brown says: “If you’re 100% traditional, please start doing Roth.”

By Elizabeth O’Brien


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