Citing the unknowns of retirement planning, Adam Levy, a registered representative at JHS Capital Advisors, collars taxes as a specific area of unconcern to some plan participants. “When helping my clients formulate a plan for distributing income in their retirement, as often as possible, I try to create as much flexibility and options when it comes to withdrawing from income,” Levy tells PLANADVISER.
Levy points out that retirement planning is full of unknowns, and people do not know where tax rates will be at retirement, or five, 10 or even 20 years into retirement. Along with health care costs and inflation, he says, many people find taxes to be their greatest threats.
Unlike a traditional 401(k) plan, contributions to a Roth 401(k) are taxed upfront, and the withdrawals are not. The money stays in the account and grows tax-free. Levy recommends plan sponsors consider adding the Roth component to their company’s 401(k) plan because of this. “Some employees may opt to make both traditional 401(k) and Roth 401(k) contributions, balancing tax-deferral with tax-free accounts as a strategy for helping to lower their current tax burden, while still having a source of tax-free income,” he says.
Younger employees have expressed interested in the Roth 401(k), Levy says. “Generally, the highest income earning years for employees are in the later stages of their career,” he points out. “When younger employees contribute after-tax money into their retirement account, they may really see a benefit, especially when compound earnings are taken into account.”
“Younger employees sometimes balk at taxes,” Levy says. “The majority of younger employees increasingly want to just be done with taxes. They would rather get the money in to the account and not have to think about paying taxes years down the road.” Younger employees may also not find the tax deduction advantageous, or they can get by with fewer deductions, he says, two cases that would make the Roth 401(k) a good choice.
The addition of a Roth 401(k) to a company plan can be used as a recruiting or a retention tool. “Companies are looking to attract quality employees, which can be a competitive task,” Levy says. Prospective employees could well view better benefits favorably and choose the company with a more extensive benefits package. More choices and flexibility make a plan more attractive, he says.
“What it boils down to, especially with my clients saving or planning for retirement, is to have the choice allowing for the flexibility to choose when to pay taxes,” Levy says. “No one knows where tax rates will be in the future, but in retirement, having the ability to decide which type of account to withdraw income from may help lessen the overall threat of taxes in retirement.” Adding the Roth 401(k) to a plan, with its options and flexibility for employees, is more a question of why not, than why.