December 14, 2023
If you have a workplace retirement plan, chances are it now offers you the choice to save in a traditional or a Roth account.
For decades, the only option was a traditional account, where you contribute pre-tax dollars, and then every dollar you withdraw in retirement is taxed as ordinary income. Plus, you must make withdrawals, as traditional accounts have annual required minimum distributions. Currently, you are required to begin taking annual RMDs from a traditional 401(k) at age 73; in 2033 the latest age you can start to take withdrawals will rise to 75.
Roth 401(k)s weren’t allowed until 2006, and it is only recently that the majority of plan sponsors have offered them. With a Roth, your contributions come from money you have already paid tax on. But in retirement, every dollar you withdraw will be 100% tax-free. The ability to contribute today, then have your money grow for a long time to a much bigger sum, and then be able to use that money tax-free is the main reason I think saving in a Roth 401(k) is the way to go.
But there has always been an odd quirk with Roth 401(k)s. Even though you won’t owe any tax on withdrawals in retirement, you still were required to make RMDs. The crazy thing was, if you rolled over your Roth 401(k) to a Roth IRA you would not be required to make RMDs from that Roth IRA. But if the money stayed in the Roth 401(k) you had to make RMDs. For no good reason.
Well, beginning in 2024, if you have a Roth 401(k), and choose to leave the money in that account, when you retire there will be no RMDs. That makes the Roth 401(k) option even better.
There’s also another important Roth 401(k) development I want you to know about: Even when employees choose to contribute to a Roth 401(k), the matching contribution they receive from their employer has been made into a traditional 401(k) account. That’s changed too. Employers are now allowed to make their matching contributions straight into a Roth account for the employee. It’s important to understand that in this scenario the employee would pay income tax on the match in the year it is received. But the payoff is that come retirement, the match will be treated the same as the money contributed into the Roth 401(k) by the worker – absolutely no taxes.
The catch is that this is voluntary. Employers don’t have to offer the match as a Roth. And most have yet to change their plan to make this possible. But I want you to know about it, so you can let your employer know it’s a benefit you would like to have.