Roth 401(k) accounts are becoming more prevalent in company-sponsored retirement plans. Whether one is right for you depends on factors including your expectations of future income-tax rates.
As with a traditional 401(k), a Roth 401(k) allows an employee to save up to $16,500 a year. (For those 50 or older, the cap is $22,000.) The difference between the two comes down to the timing of the tax breaks participants receive.
With a traditional 401(k), employees make contributions that reduce their taxable income for the year — and pay income tax on withdrawals. With a Roth, contributions receive no tax break. But withdrawals are generally tax-free.
Currently, 29% of mid-size to large employers offer the Roth (401)k option, which became permanently available to 401(k) plans in 2006, according to Hewitt Associates. An additional 25% say they are likely to add one by year end. Roths are likely to become more popular still thanks to a measure Congress passed Thursday that allows employees to transfer funds to Roth 401(k) accounts from traditional 401(k)s. (Income tax is due in the process.)