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"Should I contribute to my Roth 401(k)?"

Updated: Jun 5, 2023

Roth 401(k)s have become an increasingly popular alternative to traditional 401(k)s, allowing participants to make after-tax salary deferrals to their employer plans. Many clients may have the opportunity to contribute to a designated Roth account in their 401(k) but are uncertain about the best savings strategy for their personal circumstances.

This flowchart helps you guide your clients through a series of considerations that will inform their decision whether to contribute to a Roth 401(k), and covers:

  • Future tax rate expectations

  • Roth IRA eligibility

  • Employer matching considerations

  • RMDs and future rollover options

  • Additional savings opportunities through backdoor Roth contributions

In today's blog post, we delve into the topic of Roth 401(k) contributions and the considerations surrounding them. As Todd Pouliot from Gateway Financial, we aim to provide valuable insights into financial planning and decision-making. In this video, titled "Should I Contribute to My Roth 401(k)?," Todd explores the increasingly popular alternative to traditional 401(k) plans. Roth 401(k)s offer participants the opportunity to make after-tax salary deferrals to their employee plans. This blog post will summarize the key points discussed in the video and provide an overview of the considerations to keep in mind when deciding whether to contribute to a Roth 401(k).

The Importance of Future Tax Rate Expectations

One crucial factor to consider is your future effective tax rates. With potential changes to tax laws and the expiration of the 2017 Tax Cuts and Jobs Act set for 2025, it's essential to assess whether you expect your future tax rates to remain the same or increase. If you anticipate similar or higher tax rates, contributing to a Roth 401(k) becomes an attractive option. Unlike Roth IRAs, Roth 401(k)s have no income-based eligibility restrictions, making them a valuable tool to leverage within the tax planning framework.

Roth IRA Eligibility and Withdrawal Considerations

If you're not eligible to contribute to a Roth IRA due to income limits, a Roth 401(k) can be a suitable alternative. However, before making a decision, it's important to evaluate whether you may need to withdraw the contributions before reaching the age of 59 and a half. Roth IRAs allow tax and penalty-free withdrawals of contributions at any time, while Roth 401(k) withdrawals require plan permission and qualification. Understanding the rules and provisions of your 401(k) plan document is vital to ensure informed decision-making.

Employer Matching Considerations and Additional Savings Opportunities

If you have the capacity to save more than the annual contribution limit for IRAs ($6,000, or $7,000 if you're 50 or older), a Roth 401(k) allows higher contribution amounts. Contributing to a Roth 401(k) also enables you to take advantage of employer matching contributions, which is essentially free money that should not be left on the table. However, if you cannot save more than the IRA limit, it may be wise to consider maximizing the employer match and then explore the flexibility offered by a Roth IRA.

Exploring Alternative Strategies: Traditional 401(k) Contributions

In cases where you anticipate future tax rates to decrease or if you wish to reduce your current taxable income, contributing to a traditional 401(k) becomes a viable option. Traditional 401(k) contributions provide a tax deduction at a higher current tax rate, and distributions in retirement are taxed at potentially lower rates. Additionally, contributions to a traditional 401(k) can help reduce your adjusted gross income (AGI) and potentially qualify you for tax credits while avoiding surcharge taxes.

Addressing RMDs and Future Rollover Options

One critical consideration often overlooked is the requirement of minimum distributions (RMDs) for Roth 401(k)s. Unlike Roth IRAs, which are exempt from RMDs, Roth 401(k)s are subject to these mandatory withdrawals. To minimize RMDs, individuals concerned about this issue can consider rolling over their Roth 401(k) into a Roth IRA before reaching the age of 72.

Exploring Backdoor Roth Contributions for Higher Savings

For individuals seeking to save more than the annual Roth 401(k) contribution limit, a backdoor Roth contribution strategy may be an option. This involves making a nondeductible contribution to a traditional IRA and subsequently converting it to a Roth IRA or 401(k). However, it is crucial to thoroughly understand the rules and limitations associated with this strategy and consult with a financial planner to ensure compliance.

Deciding whether to contribute to a Roth 401(k) requires careful evaluation of various factors, including future tax rate expectations, Roth IRA eligibility, employer matching considerations, RMDs, and potential backdoor Roth contributions. By understanding these considerations and having a well-thought-out financial plan, individuals can make informed decisions that align with their long-term goals. Consulting with a knowledgeable financial planner can provide valuable guidance and ensure a comprehensive approach to tax planning and retirement savings.

Remember to visit Gateway Financial at for more insightful videos and information on financial planning.


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