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More 401(k) plans are adding Roth accounts — but investors aren’t following


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Roth accounts are available in more 401(k) plans than ever. Retirement savers aren’t rushing in.    

About 75% of employers with a workplace 401(k) allowed employees to save money in a Roth account in 2019 — up from 69% the year prior and 46% a decade earlier, according to most recent data from the Plan Sponsor Council of America.

Yet the share of 401(k) investors saving in a Roth account remains stubbornly low.

About a quarter of 401(k) investors do so — a share that’s been fairly steady in recent years, according to Nevin Adams, head of research at the American Retirement Association, a trade group that includes the Council.

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A Roth 401(k) is a type of after-tax account. Savers pay tax up front on contributions; they don’t pay tax on contributions or any investment earnings when they withdraw funds in retirement.

This is different from traditional pre-tax savings, whereby savers get a tax break up front but pay later. Workers can contribute up to $19,500 to their 401(k) this year between the two account types. (Those 50 and older can save an extra $6,500.)

“We’ve found the Roth is so underutilized,” said Ellen Lander, principal and founder of Renaissance Benefit Advisors Group, based in Pearl River, New York “It’s amazing to me how much misunderstanding there is.”

Roth benefits

Some may shun a Roth because they assume their spending — and hence their tax bracket — will fall when they retire. But that doesn’t always happen, according to financial advisors.

And there are benefits to Roth accounts beyond tax savings.

For one, savers don’t need to take required minimum distributions from Roth accounts, unlike with traditional pre-tax 401(k) accounts. Savers can also reduce their Medicare Part B premiums, which are based on taxable income in retirement; Roth accounts, which yield tax-free income, can help keep one’s income below certain thresholds over which premiums may rise significantly.

Some advisors recommend allocating 401(k) savings to both pre-tax and Roth, regardless of age, as a hedge. About 70% of 401(k) plans allow for both, according to the Plan Sponsor Council of America.

“It’s not just about taxes, it’s about flexibility,” Lander said. “We’ve been taught to diversify investments.

“We should be diversifying our tax strategy.”

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