Money·3 min read

If You Haven’t Heard of a Roth 401(k), Here’s What You’re Missing Out On

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Design: theSkimm | Photo: iStock
Oct 5, 2022

While reviewing your employer’s retirement savings options, chances are you skipped over the Roth 401(k). And you’re not the only one. Fidelity says 75% of their corporate clients offer a Roth 401(k)...but only 13.6% of employees actually use it. Here’s what you could be missing out on if you’re only using a more traditional retirement savings account (hi, Roth IRA and 401(k)).

I’ve never heard of a Roth 401(k). How does it work?

This isn’t your parents’ retirement savings account. A Roth 401(k) is a retirement savings plan that’s part 401(k) and Roth IRA. Because you can open it through your employer (like a 401(k)). And it’s funded with after-tax dollars, but withdrawals are tax-free (like a Roth IRA) after age 59 1/2. In the world of retirement investment accounts, the Roth 401(k) is a newer addition, debuting in 2006. Which is why you may not have heard of it before. 

What’s the difference between a Roth 401(k) and other retirement savings accounts?

A Roth 401(k) is similar to a Roth IRA in some ways. Example: Both accounts are funded by after-tax dollars. But your employer isn’t involved with a Roth IRA. Instead of opting in at work,  you’d have to open a Roth IRA through a brokerage firm like Fidelity or TD Ameritrade. Here’s an overview of the key differences:

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Any other Roth 401(k) benefits I should know about?

Like traditional 401(k)s, your employer can match your contributions to your Roth 401(k). Meaning, free money. But check with your employer for details on limits. Another advantage of using a Roth 401(k) is that your money grows tax-free because taxes are deducted upfront. Psst…if you’re expecting a big income boost later in life, it might benefit you to pay taxes on your contributions now rather than later.

I’m ready to hear the downsides.

If you’re on a really tight budget, a Roth 401(k) might not be the best choice. Because you’d be taking a tax hit on your net pay instead of your gross pay. The good news: There’s a chance your employer might let you split your contributions between a Roth 401(k) and a traditional 401(k). Contact HR to find out if that’s an option for you.

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A traditional retirement savings account may not be the perfect answer to your savings goals. Enter: a Roth 401(k). Remember to do your research to figure out which retirement savings plan is right for you. And don’t be afraid to ask your employer for more info on all the options out there.  

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