If Your 401(k) Doesn’t Have This Feature, You May Want to Save for Retirement Elsewhere

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Have a 401(k) through your job? Read on to see what feature you should really want your plan to offer. 

If you have a 401(k) plan through your employer, you have a prime opportunity to build up a solid retirement nest egg. But does your company’s 401(k) offer you the option to save in a Roth?

As of 2021, about 88% of 401(k) plans included a Roth savings option, according to the Plan Sponsor Council of America as reported by CNBC. But if your 401(k) doesn’t come with a Roth, you may want to put your nest egg elsewhere.

The importance of being able to save in a Roth

With a traditional IRA account or 401(k), you get an immediate tax break on your contributions. So if you put $3,000 into one of these plans, the IRS won’t tax you on $3,000 of income the year you make your contributions.

However, with a traditional retirement plan, you’ll be taxed on withdrawals during retirement. And you’ll also be forced to take required minimum distributions, or RMDs.

RMDs effectively force you to spend down your plan balance in your lifetime rather than get to leave that money alone. For some people, they’re not a problem, because those withdrawals are needed to cover living costs.

But if you end up with a large Social Security benefit and other income, like earnings from a job you opt to hold down, then you may not need to tap your savings in retirement every year. With a traditional IRA or 401(k), at some point, you won’t get that choice because RMDs will apply.

Now, let’s talk about Roth IRAs and 401(k)s. With a Roth savings plan, you don’t get an immediate tax break on the money you contribute. But withdrawals are yours to take tax-free during retirement.

Plus, right now, Roth IRAs are the only tax-advantaged retirement plan to not impose RMDs. And come 2024, Roth 401(k) plans won’t force savers to take RMDs, either. That gives you a lot more flexibility in retirement.

Also, think about how burdensome it might be to have to pay taxes on your retirement plan withdrawals at a time in life when money may be tighter. With a Roth IRA or 401(k), that won’t be a concern.

You don’t have to save in your employer’s plan

Just because you’re offered a 401(k) plan through your job doesn’t mean you have to participate in it. So if your company’s 401(k) doesn’t come with a Roth option, you may want to open a Roth IRA on your own and save your money there.

Of course, if your company offers a 401(k) match, you may want to contribute enough to that plan to capitalize on that match in full, since that’s akin to getting free money for your retirement. But beyond there, you may want to keep your savings in a retirement account that allows you to benefit from a Roth setup.

And to be clear, you can absolutely have retirement savings in more than one account. So if your only choice through your employer is a traditional 401(k), you can fund it just enough to snag your match and then open a Roth IRA elsewhere.

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