Many Americans lack access to employer-sponsored retirement plans, such as 401(k)s. In such cases, individuals can turn to Individual Retirement Accounts (IRAs) as an alternative method to save for retirement. While IRAs have lower contribution limits compared to 401(k) plans, they still serve as valuable tools for building a retirement nest egg.
One of the major advantages of saving for retirement in a 401(k) plan is the higher contribution limits it offers, along with the potential for employer-matching contributions. This means that workers can benefit from additional funds towards their retirement without having to contribute it themselves.
However, individuals should consider the benefits of a Roth 401(k) if their employer offers it. While contributions to a Roth 401(k) are not tax-free like they are in a traditional 401(k), they provide other advantages. These include the potential for tax-free investment gains and tax-free withdrawals during retirement.
Over the years, the availability of Roth 401(k) plans has been increasing. According to the Plan Sponsor Council of America, in 2013, only 58% of employer 401(k) plans offered a Roth option. However, by 2024, this number had risen to just above 89%. This expanding availability is advantageous because tax-free withdrawals can alleviate financial strain for retirees.
Another reason why you should consider a Roth 401(k) is that it eliminates concerns regarding potential future tax rate changes. By investing in a Roth retirement account, individuals no longer need to worry about the impact of future tax code modifications because their withdrawals will remain tax-free regardless.
A recent change in regulations has made Roth 401(k) plans even more appealing. Starting in 2024, Roth 401(k) accounts will no longer require minimum withdrawals, which is similar to Roth IRAs. This flexibility enables savers to leave their balance intact and continue growing their savings tax-free if they do not need to tap into their 401(k) funds in a given year.
The growing availability of Roth 401(k) plans presents a positive opportunity for retirement savers. Those who have access to Roth 401(k) options or may have them in the future should consider incorporating them into their retirement savings strategy. The ability to benefit from tax-free investment gains, tax-free withdrawals, and the elimination of required minimum withdrawals offers individuals the potential for a financially secure retirement.