3 Reasons to Choose a Roth 401(k) Over a Traditional 401(k) for Retirement Savings
Key Points
Traditional 401(k)s are appealing because they result in immediate tax savings.
While a Roth 401(k) doesn't give you tax-free contributions, you can benefit tremendously from having one of these accounts.
You not only get tax-free retirement income, but protection against future tax rate increases.
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There's a reason traditional 401(k)s tend to be a popular retirement savings tool. With a traditional 401(k) plan, your money goes in on a pretax basis, allowing you to shield some of your income from the IRS immediately.
With a Roth 401(k), your contributions go in on an after-tax basis. And if you're someone who likes instant gratification, a Roth 401(k) might seem like the wrong choice for you. But here are a few reasons to choose a Roth 401(k) over a traditional one -- despite losing that up-front tax break.
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1. You get tax-free withdrawals in retirement
Taxes can be a huge burden at any stage of life. But in retirement, they can be extremely stressful.
One nice thing about Roth 401(k)s is that withdrawals from these accounts are tax-free. And that's important for a few reasons.
First, the less taxable income you have as a retiree, the less likely you may be to be taxed on your Social Security benefits. Also, the lower your taxable income, the less likely you may be to face surcharges on your Medicare premiums, known as income-related monthly adjustment amounts.
2. You get protection against future tax hikes
Today's tax rates are not guaranteed to remain in place forever. Lawmakers could opt to raise tax rates broadly in the future. But a Roth 401(k) protects you from that.
When you fund a Roth 401(k), you do so with pretax dollars. That means you're effectively locking in your current tax rate on that money.
3. You get more flexibility with your money down the line
Because the IRS gives savers a big tax break on traditional 401(k) contributions, it also forces savers to eventually start taking withdrawals known as required minimum distributions, or RMDs. RMDs not only force you to remove funds from your savings that will no longer get tax-advantaged treatment, but they could also result in a large tax bill.
Another nice thing about Roth 401(k)s is that they do not force you to take those mandatory distributions. This gives you more flexibility with your money in retirement. And, if you so desire, it could also help make it easier to pass down some of your savings as an inheritance.
There are multiple benefits to saving for retirement in a Roth 401(k). Before you assume a traditional 401(k) makes the most sense for you, take the time to learn about the advantages Roth 401(k)s have to offer. You may end up changing your mind -- and setting yourself up for a smoother retirement, financially speaking.
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