Should I Contribute To My Roth 401(K)?

If you are considering saving for retirement through your employer plan, you may have the opportunity to contribute to a designated Roth account in your 401(k). However, deciding whether to contribute to a Roth 401(k) can be complex and depend on your individual circumstances.

Firstly, it is important to consider your future tax rate expectations. If you expect your tax rate to be higher in retirement than it is currently, contributing to a Roth 401(k) may be a good option. However, if you expect your tax rate to be lower in retirement, a traditional 401(k) may be more advantageous.

Another factor to consider is your eligibility for a Roth IRA. If you are eligible to contribute to a Roth IRA and expect to be in a lower tax bracket in retirement, contributing to a traditional 401(k) may be a better option as it allows you to defer taxes until retirement and potentially take advantage of a lower tax rate.

It is also important to consider your employer matching contributions. If your employer offers matching contributions, it may be beneficial to contribute enough to your traditional 401(k) to receive the full match, and then contribute additional savings to a Roth IRA or Roth 401(k).

Additionally, it is important to consider future required minimum distributions (RMDs) and potential rollover options. Contributing to a Roth 401(k) can eliminate the need for RMDs, which can be advantageous for those who do not need the funds in retirement. However, if you expect to roll over your retirement savings into a traditional IRA or employer plan in the future, it may be beneficial to contribute to a traditional 401(k) to simplify the rollover process.

Finally, it is worth considering additional savings opportunities through backdoor Roth contributions if you are eligible. This strategy allows high-income earners to make after-tax contributions to a traditional IRA and then convert them to a Roth IRA.

In summary, deciding whether to contribute to a Roth 401(k) depends on your individual circumstances and requires careful consideration of future tax rate expectations, Roth IRA eligibility, employer matching contributions, RMDs and future rollover options, and potential backdoor Roth opportunities.

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Robert J. Pyle, CFP®, CFA, AEP® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinion, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.