Kelly Bullis: Should you consider a Roth 401k?

Well, 2023 has been a much better year for 401k balances. Fidelity Investments has reported an annual increase of 8.3% compared to June 2022. The number of 401k participants with balances over $1 million has increased almost 29%.

What a wonderful thing a 401k is. If you are younger and haven’t started socking away some of your earnings into a 401k yet, now is a good time to start. If you are in that “sweet spot” of earnings maxed, kids out of the house, etc. and you are not maxing out your 401k contributions every year, now is a good time to start.

Did you also know what a wonderful thing a Roth 401k is? For high income earners, they are limited to making contributions to Roth IRAs, but no income limits exist for Roth 401k accounts.

A Roth 401k is one type of retirement option that doesn’t get talked about much. On top of making your 401k contributions, have you considered mixing up your maximum contributions to include some going to a Roth 401k each year too?

Some things to consider. Tax rates are bound to go up in the future. When you must start taking your Required Minimum Distributions (RMD) at 73 years old, they might end up being taxed at a higher tax rate than you saved when you made the contributions back in prior years. Also, RMDs can trigger a higher portion of your Social Security being taxed, it may also trigger a surcharge on your Medicare premiums, and if you have enough unearned income, it might push you over the top to have to pay Net Investment Income Tax. Roth accounts (IRA or 401k) do not require any RMDs. When any distributions are taken from a Roth account, they are 100% non-taxable, thus potentially saving on Social Security being taxed, reducing Net Investment Income Tax, as well as most likely not triggering higher Medicare premiums.

By choosing to shelter some of your retirement savings in Roth-based solutions, it cannot only help in the above listed issues but protect you from future tax increases as well.

Here is another thought. Young folks usually are not in high tax brackets, so the tax savings from contributing to a traditional tax deferred retirement account is minimal. A better solution for young folks may be contributing to a Roth account instead. You still get the benefit of socking away money for future retirement that grows over many years, (the earlier you make the contributions, the more years it grows) but the added benefit is never being taxed on those retirement savings in later years, unlike traditional retirement solutions.

Why not quit procrastinating and add a Roth 401k to your retirement savings plans?

Have you heard? Prov 21:5 says, “The plans of the diligent surely lead to profit; and everyone who is hasty surely rushes to poverty.”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com. Also on Facebook.