Roth 401(k)s Gaining Ground, Enhancing Retirement Readiness

The use of Roth 401(k)s by retirement plan sponsors has been on the uptick for the past several years. According to research conducted by PLANSPONSOR.com, 52.4% of employers now offer a Roth-type defined contribution account, compared with only 11% in 2007. Among the largest plans (those with more than $1 billion in plan assets), 61% now offer the Roth option.

 

Because taxes are paid on Roth accounts now instead of when withdrawn -- typically in retirement -- industry analysts observe that funding retirement with a Roth 401(k) can help to reduce concern over taxation -- specifically whether employees will be in a higher tax bracket when they retire and throughout their retirement years. This in turn helps to facilitate sound retirement income planning.

 

Financial planners also point out the advantages Roth assets bring to the table with regard to planning for health care costs in retirement. Because the taxes paid on Roth contributions do not get added to the modified adjusted gross income (MAGI) calculation, proceeds from Roth accounts do not affect an individual's tax bracket, which is used to determine the cost of Medicare Parts B and D premiums in retirement.

 

Despite the considerable benefits Roth 401(k)s offer retirees, research shows that most participants signing up for the Roth option are young and have very long time horizons. Data from Aon Hewitt, as reported by PLANSPONSOR.com, found that about 17% of workers between the ages of 20 and 29 sign on to the Roth 401(k), compared with just 9% of workers in the 50 to 59 age range and 5.7% of those aged 60 and above.

 

Which industries like the Roth 401(k)s the most? The top five in order of popularity are business, professional, and nonprofit (17%); agriculture, mining, and construction (16%); wholesale and retail (16%); education and health (16%); and media, entertainment, and leisure (13%).

 

Source:

PLANSPONSOR.com, "Roth Accounts Can Improve Retirement Outcomes," July 10, 2014.

 

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