Have a 401(k) Through Your Job? It Pays to See if It Offers This Perk

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It’s important to make the most of your 401(k). Read on for a benefit your employer’s plan might offer. 

Saving money for retirement is essential. If you don’t manage to accumulate a decent nest egg, you might struggle financially once your career comes to an end and you’re no longer collecting a paycheck. If your employer offers a 401(k) plan, it pays to sign up for it.

One major benefit to participating in an employer-sponsored 401(k) is that contributions are made directly from your paychecks. So you don’t have to worry about sending money into your retirement account every month.

Plus, many employers that offer 401(k)s also match worker contributions to some degree. So if you put, say, $2,000 into your 401(k) this year, that may result in an additional $2,000 from your employer. You can contact your HR department to find out more about your company’s specific plan.

Meanwhile, some 401(k) plans offer a Roth savings feature. If yours does, it pays to take advantage, especially since the rules for these plans are changing for the better this year.

The upside of a Roth 401(k)

With a traditional 401(k) or IRA, contributions are often tax free, which means you can shield some income from taxes the year you fund your account. For example, if you put $2,000 into either a traditional 401(k) or IRA this year, the IRS won’t tax you on $2,000 of your salary (as long as you’re below the income limits set by the IRS). Plus, investment gains in a traditional 401(k) and IRA are tax deferred, which means you don’t pay taxes until you take withdrawals.

Roth accounts work differently. With a Roth 401(k) or IRA, you do not get a tax break on the money you put in. However, investment gains in these accounts are tax free, not just tax deferred — meaning, you pay no taxes on those gains, ever. Plus, withdrawals from a Roth are tax free, which means you won’t have to worry about the IRS taking a chunk of your income in retirement.

A positive retirement account change for 2024

It used to be that Roth IRAs were the only tax-advantaged retirement account to not impose required minimum distributions, or RMDs. RMDs basically force you to spend down your retirement account balance in your lifetime.

The IRS imposes these because it doesn’t want IRAs and 401(k)s to become vehicles used by the wealthy to pass down inheritances in a tax-advantaged manner. Rather, it wants these plans to serve their intended purpose — providing seniors with retirement income.

Starting this year, however, Roth 401(k)s are joining Roth IRAs in not imposing RMDs. With a Roth 401(k), you’ll get more control over your money. You can leave your savings alone in retirement for a period if you don’t need to take withdrawals right away, which will allow your money to remain invested and potentially grow even more.

Now, not every 401(k) plan offers a Roth version. But if yours does, you may want to consider signing up.

And if your employer’s retirement plan doesn’t come with a Roth feature, it wouldn’t hurt to ask for one now that the rules have changed for the better. Your employer may be willing to implement that change if enough people request it.

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