Employees Say They Like the Roth 401(k)
A new BofA Merrill Lynch survey reveals workers are realizing the benefits of the plan, which pulls taxes up front, not at retirement.
Brenda Mackey has been saving in a Roth Individual Retirement Account since she was 22 years old. She had no idea she could save this way in her 401(k) plan at work until she saw the option on her plan menu when signing up for benefits in her new job.
“I didn’t know Roth 401(k) existed,” Mackey said. “I knew the benefits of Roth, but I didn’t do it at first” in the 401(k) plan.
A few months into her job as a content marketing specialist at Indianapolis-based business consultancy Walker Information, Mackey switched to the Roth 401(k). She said she would rather pay taxes up front and pay nothing in retirement.
The difference between the two accounts is about $30 a paycheck.
“I feel like I’m taking away the gamble” of how much will be owed in taxes at retirement, Mackey said. “I know what I’m paying now, and I won’t have to pay taxes in the future. I like that.”
Roth 401(k)s have been available for decades, but it is just recently that workers are realizing the benefits of the retirement savings account, according to Bank of America Merrill Lynch’s 2017 “Plan Wellness Scorecard.” Nearly a third of employees who have access to Roth 401(k)s increased their contributions last year. In addition, more than half of those contributing to a Roth are millennials like Mackey.
A Roth 401(k) can be a savvy way to diversify the tax impact at retirement. In a traditional plan, money goes in tax free, it grows tax free, and then it is taxed at a specific income rate at retirement. With a Roth, the formula is flipped: Participants pay taxes up front, money grows tax free and is withdrawn tax free.
In using a Roth, participants are betting they are at a lower tax rate now than when they need the money.
Sylvie Feist, BofA Merrill Lynch’s director of financial wellness strategy, said employers are adopting a broader perspective helping their workers gain confidence in making money decisions. They are simplifying plans by using express enrollment, automatic features and by offering more ways to save.
According to the survey, 57 percent of employers who offer a traditional 401(k) also offer the Roth option. In addition, the Roth option recently became a one-click and done selection in BofA Merrill Lynch’s Advice Access online advisory service tool.
“Employers have made efforts from a plan design perspective to help employees save more,” Feist said. “We find a lot of people are struggling today in making financial decisions. Employers are helping [employees] explore options — are [employees] maximizing their benefits and asking how they all play together.”
In addition, employers have expanded by offering tax-friendly health savings accounts. With HSAs, employees can add money tax free, the funds grow tax free and can be taken out for medical purposes tax free. HSAs can also be used this way in retirement.
The Plan Wellness Scorecard showed that the number of workers using HSAs increased 21 percent; those workers increased their balances by 31 percent. On average, workers spend about 70 percent of their HSA balance on medical expenses but save 30 percent for future costs.
“People are just starting to understand the power of an HSA,” Feist said.
Patty Kujawa is a freelance writer in the Milwaukee area. Comment below or email firstname.lastname@example.org.