After being introduced nearly 20 years ago, a Roth option is now available in 93% of all 401(k) plans. However, according to the Plan Sponsor Council of America, just 21% of eligible workers utilize that option.
Why do so few eligible employees opt for a Roth? Reasons include: a lack of understanding about how a Roth account differs from a traditional 401(k) plan account, the appeal of an immediate tax deduction that comes with traditional 401(k) plan contributions, and perhaps most importantly, the fact that auto-enrollment mechanisms used by many employers tend to default to traditional plans.
As with a Roth IRA, contributions to a Roth 401(k) are not tax-deductible, but all money withdrawn after age 59½ is tax-free. That’s the opposite of how things work with a traditional IRA or 401(k) plan account, where contributions are tax-deductible but withdrawals after age 59½ are taxable.
When does a Roth make sense?
Roth accounts are commonly recommended to younger workers who are in the early stages of their careers. The thinking is that it’s preferable to pay income taxes when you’re in a relatively low tax bracket in exchange for being able to take tax-free withdrawals when you’re older and may be in a higher bracket.
However, it can make sense for older and/or higher-income earners to utilize a Roth as well. Diversification doesn’t just apply to your portfolio holdings, it applies to the types of accounts you use as well. It can be wise to diversify your tax strategy by spreading your investments across tax-deferred, tax-deductible, and taxable accounts. Each one has its own benefits, and no one knows how the tax treatment on such accounts may change down the road.
For higher-income earners, here’s another important benefit of a Roth 401(k): If your employer offers a Roth option, it’s available to you no matter how high an income you earn. By contrast, access to a Roth IRA begins phasing out for married couples filing jointly at $236,000 of household income and becomes completely unavailable at $246,000 of income. With a Roth 401(k), the contribution limits are much higher than with a Roth IRA as well — $23,500 vs. $7,000 for a Roth IRA ($31,000 vs $8,000 if you are 50 or older).
Keep in mind that choosing between a traditional and a Roth 401(k) is not an either/or decision. If your employer offers a Roth option, you should be able to split your contributions between the two account types.
Some will soon have to use a Roth
Beginning next year, older high-income workers who take part in their employer’s 401(k) plan will be required to use a Roth account for at least part of their contributions. The new law pertains to the $7,500 in “catch-up” contributions workers age 50 and older are allowed to make beyond the otherwise maximum amount of $23,500. Starting in 2026, if such workers earned $145,000 or more in the prior year, catch-up contributions made in 2026 must be to a Roth 401(k).
Does your employer offer a Roth 401(k) option? If so, do you contribute to it? Why or why not?
