3 Reasons to Save in a Roth 401(k) -- and 2 Reasons Not To

The Roth 401(k) isn't even 20 years old yet, but it's already become a popular place for workers to stash their retirement savings. A 2022 survey found that 90% of 401(k) plans enabled employees to make Roth contributions if they chose.

But that raises an interesting question: Are Roth 401(k) contributions worth it? The answer depends a lot on you and your retirement plans. Here are three pros and two cons of contributing to a Roth 401(k) to help you decide.

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Three reasons to save in a Roth 401(k)

Let's start with the three reasons to put at least some of your savings in a Roth 401(k) this year.

1. After-tax contributions

You fund Roth 401(k)s with after-tax dollars, just like Roth IRAs. This means that you pay taxes on your contributions in the year you make them. But then your money grows tax-free afterward. You can take the money out tax- and penalty-free once you're at least 59 1/2 and have had the account for at least five years.

Roth accounts are attractive for those who expect that their incomes will either stay about the same or rise in retirement. By paying taxes up front, they lose a smaller chunk of their savings to the government than they would if they went with a traditional 401(k), which gives an up-front tax break in exchange for owing taxes on withdrawals later on.

2. High contribution limits

Roth 401(k)s have the same high contribution limits as traditional 401(k)s. In 2024, adults under 50 can contribute up to $23,000 in one of these accounts. Those 50 and older can set aside up to $30,500 this year.

Unlike Roth IRAs, which have income limits that restrict who can contribute, Roth 401(k)s allow people of any income to save in them. This makes them a great choice for high earners who want to build their Roth savings but don't want to deal with the hassle of a backdoor Roth IRA.

3. Possibility of an employer match

Employers have the option to make matching contributions to an employee's Roth 401(k) just as they would with a traditional 401(k). This could potentially grow your balance by hundreds or thousands of dollars, depending on your salary, the company's matching formula, and your personal contributions.

Prior to 2024, all employer-matched funds were pre-tax, meaning they went into a traditional 401(k) regardless of which type of 401(k) you were saving in. But in 2024, employers have the option to make after-tax matches if they want. However, this is only an option, and some employers may elect to continue making pre-tax matches. Talk to your HR department if you're unsure how the government will tax your employer match.

Two reasons not to save in a Roth 401(k)

Roth 401(k)s have their drawbacks, just like any other retirement account. Here are two to be aware of before you put your savings here.

1. Limited investment choices compared to IRAs

All 401(k)s limit your investment options, usually to a handful of funds your employer selects. These aren't always bad choices, but they may not be the best investments for you, either. Target date funds are common. These are hands-off investments that adjust their asset allocation over time to help you maximize your gains while you're young and protect what you have as you age. But they often have high fees and may not match your retirement timeline.

If this bothers you or you're not eligible for a 401(k) match through your job, you may prefer to save in a Roth IRA. Most workers can set aside up to $7,000 in a Roth IRA in 2024 or $8,000 if you're 50 or older. If you max this out, you could always go back to your Roth 401(k) then.

2. Inability to withdraw contributions penalty-free

Roth IRAs enable you to withdraw your contributions tax- and penalty-free, regardless of your age or how long you've had the account. The idea is that since you've already paid taxes on these funds, you can do what you want with them. But Roth 401(k)s don't permit you to do this even though these also contain after-tax dollars.

Ideally, you'd leave your retirement funds alone until you actually quit the workforce so they can grow. But if you like the idea of having access to some of your cash in a pinch, a Roth IRA might be a better fit. Just remember that you can only withdraw contributions for free. You could pay taxes, penalties, or both if you withdraw earnings from the account before retirement age.

It's your decision

Only you can decide if a Roth 401(k) is a good fit for your retirement savings. Hopefully, the pros and cons above made the decision clearer. But if you're still on the fence, remember, you don't have to put all your savings in one account.

You could always set a portion in a Roth 401(k) and put the rest in a traditional 401(k), a Roth IRA, or another account that suits you. Go with what you feel is best for you right now and revisit the question of where to keep your savings at least once per year, or whenever your financial situation changes.

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