Roth 401(k): To Contribute or Not to Contribute? A Comprehensive Comparison

Top 7 Reasons to Contribute to a Roth 401(k)

1. Tax-Free Withdrawals 

Contributions grow tax-free, and qualified withdrawals in retirement are tax-free, providing a tax-free income stream.  

2. No Required Minimum Distributions (RMDs)

Unlike traditional 401(k)s, Roth 401(k)s have no RMDs during your lifetime, giving you more control over your retirement funds. 

3. Tax Diversification

Having both Roth and traditional retirement accounts provides tax diversification, allowing your to better manage your tax situation in retirement.  

4. Inheritance Benefits

Roth 401(k)s can be passed on to heirs with tax-free growth, providing a valuable estate planning tool.  

5. Potential for Higher Tax Rates  

If you expect to be in a higher tax bracket in retirement, paying taxes now with a Roth 401(k) may save you money in the long run.  

6. No Income Limits

Unlike Roth IRAs, Roth 401(k)s do not have income limits, making them accessible to high earners.

7. Employer Contributions 

you can still receive employer matching contributions, which are placed in a traditional 401(k) account, allowing you to benefit from both types of accounts. 

Top 7 Reasons Not to Contribute to a Roth 401(k)

1. Immediate Tax Impact  

Contributions to a Roth 401(k) are made with after-tax dollars, reducing your current take-home pay.  

2. Lower Current Income 

If you are in a high tax bracket now but expect yo be in a lower tax bracket in retirement, a traditional 401(k) may be more beneficial. 

3. Potential Tax Law Changes  

Future tax laws could change, impacting the benefits of Roth 401(k) accounts.  

4. Complexity in Management 

Managing both Roth and traditional accounts can add complexity to your retirement planning. 

5. Limited Contribution Limits   

The overall contribution limit for 401(k) accounts is the same, meaning your total contributions to Roth and traditional accounts combined cannot exceed the annual limit.  

6. No Immediate Tax Deduction 

Contributions to a Roth 401(k) do not provide an immediate tax deduction, unlike traditional 401(k) contributions. 

7. Impact on Financial Aid  

Having significant Roth 401(k) balances may impact your eligibility for financial aid or other need-based assistance programs. 

Conclusion

Deciding whether to contribute to a Roth 401(k) depends on your current financial situation, future tax expectations, and retirement goals. Weighing the pros and cons can help you make an informed decision that aligns with your long-term financial strategy. 

Curious which is best for you or want to learn more about the Roth? Give us a call. 

Scott Higgins | AIF ®, CFP®, CPFA®, NSSA®

Financial Advisor 

Since 2012 at Rose Street, Scott has been responsible for helping the firm’s individual wealth management clients with income strategies for retirement and consulting with employers with their employee retirement plans. In free time, he enjoys golf, biking, skiing, cooking, and traveling. Fun Fact, Scott has a hobby of filling growlers with coins!

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