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Need a home for your long-term savings? Read on to see why a Roth 401(k) could be your best choice.
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You’ve probably heard by now that you should be saving for retirement consistently so that you have plenty of money to live on later in life. And it’s important to find the right home for your retirement savings.
A traditional IRA or 401(k) could be a good choice for your long-term savings because these accounts give you a tax break on your contributions. But you’ll have to pay taxes on the money you withdraw in retirement. And you may not want that added expense at a time when your income might be limited.
As such, you may be more inclined to save for retirement in a Roth IRA or Roth 401(k). Roth retirement plans give savers the benefit of tax-free investment gains and withdrawals.
It’s easy to make the argument that a Roth IRA or a Roth 401(k) is a good place to save your money. But you may want to favor a Roth 401(k) for these reasons.
1. There’s no income limit to worry about
Higher earners are barred from contributing directly to a Roth IRA. The income limits for doing so change every year. Currently, singles earning more than $153,000 and married couples earning more than $228,000 cannot contribute to a Roth IRA. In 2024, these limits are rising to $161,000 and $240,000, respectively.
Roth 401(k)s, on the other hand, have no income-related restrictions. So even if you’re single and earning $1 million a year, you can put money into a Roth 401(k).
2. You can put more money into a Roth 401(k)
The IRS sets annual contribution limits for IRAs and 401(k)s. And those limits don’t differ between traditional and Roth accounts. Right now, IRAs max out at $6,500 for savers under 50 and $7,500 for those 50 and over. In 2024, these limits will rise to $7,000 and $8,000, respectively.
But the contribution limits for 401(k)s are much higher. Right now, savers under 50 can contribute up to $22,500 to a 401(k), and those 50 and over can contribute up to $30,000. Next year, these limits are rising to $23,000 and $30,500, respectively.
It’s important to note that the money you contribute to a Roth retirement account won’t result in a near-term tax break. But the more you’re able to pump into your account, the more tax-free investment growth you have the potential to benefit from.
3. Starting in 2024, you won’t have to worry about required minimum distributions
It used to be that Roth IRAs were the only tax-advantaged retirement plan to not impose required minimum distributions, or RMDs. RMDs effectively force savers to spend down their savings in their lifetime.
Starting in 2024, though, Roth 401(k)s will stop forcing savers to take RMDs. So if you’re someone who wants the option to leave money behind for younger generations, a Roth 401(k) will soon be able to help you achieve that goal.
There are plenty of good reasons to save for retirement in a Roth IRA. And to be clear, not everyone has access to a 401(k) through a job. And even if you do, your employer’s savings plan is not guaranteed to offer a Roth option. But if you have the ability to save in a Roth 401(k), you may want to strongly consider it for all of these reasons.
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