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Something You May Not Know About Employer-Sponsored Retirement Plans

Did you know that if an employer wants to offer employees participation in a Roth 401k plan, they are also required to make a traditional 401(k) plan available? Well, to be a little more specific, the traditional plan requirement kicks in when employers make matching contributions. These matching funds must go into a regular plan, which can then be converted to a Roth.

When it comes to employer-sponsored retirement plans, it’s no secret that 401(k) plans dominate the retirement savings landscape. These retirement savings plans are very popular because they allow workers to save for the future, defer income taxes, reduce their taxable income and, in some cases, receive matching contributions from their employer.

Only in recent years have employers been able to offer their employees a plan funded with after-tax dollars. This means that when a Roth 401k member reaches age 59½, their funds, both contributions and earnings, will be available to them tax-free. The only condition is that the savings plan must be at least five years old.

In this case, the employee has the option of contributing to either a traditional or a Roth plan, or both at the same time. This ability to contribute to both can be useful if an employee is unsure of what their tax bracket will be when they retire.

If an employee anticipates that their retirement tax bracket will be higher than the one they are in now, a Roth 401k may be a smarter choice. This projection is usually reasonable, given that a person can expect their tax deductions to decrease as they approach retirement.

But what if the employee wants to gamble that their tax group will below retired? Well, in that case, they might want to defer taxes by contributing to a 401(k).

However, contributing to both at the same time can allow an employee to hedge their rates by splitting their contributions into funds that have already been taxed, while deferring taxes on the rest of their contributions.

Another interesting benefit of a Roth 401k is that, unlike a Roth Individual Retirement Account, there are no income limits for participation. However, there are limits on annual Roth 401(k) contributions of $16,500 for people under the age of fifty. If you’re over 50, that limit increases to $22,000.

When it comes time to retire, a person has several options for using their funds.

If they’re simply changing jobs and the new employer doesn’t offer a dedicated 401k plan, they can either roll their funds directly into a Roth IRA or leave their money where it is, as long as the former employer’s plan allows it.

If the person doesn’t plan on getting a job, their money can be rolled over to another 401k, 403b or IRA…all Roth versions.

Make no mistake. Participating in an employer-sponsored retirement plan that offers both Roth and traditional 401k can provide excellent tax advantages if you plan accordingly. If you want to receive tax-free income during retirement, then participating in a Roth 401k may be the way to go. However, if you want to reduce your current tax liability and pay taxes in retirement, a traditional plan may be the savings strategy for you. In any case, it would be in your best interest to obtain professional tax advice before taking any specific action.

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