Many of you are probably familiar with a 401(k) - or employer sponsored retirement plan. Every year during benefits enrollment you decide what percentage of each paycheck will go into your retirement plan. But you may not be aware of a benefit option with your 401(k) plan that is quite often overlooked: the Roth 401(k).

According to new research from Willis Towers Watson, referenced in this article, over half of employers offer both the traditional (pre-tax) and Roth (after-tax) 401(k) but only 10 percent of employees are participating in the Roth 401(k). The Roth 401(k) is different from the traditional 401(k) because contributions are made after tax, reducing your pay check dollar for dollar, have the potential for tax free growth, and can be withdrawn tax free in retirement. In addition, there is no required minimum distribution from Roth accounts when you reach age 70 1/2 years old like there is for traditional retirement accounts.

The benefit of a Roth to employees may be even greater for younger workers because their tax bracket is likely lower now than after a few decades of potential increased earnings when they intend to use that retirement money.

Roth 401(k)s aren't for everyone. Because of the after-tax treatment, the Roth contribution takes a bigger chunk from your paycheck than a traditional 401(k) contribution. For example, if your salary is $40,000/year, a 4% contribution to a traditional 401(k) would save you approx. $25/month in taxes because you are deferring the taxes until you take distributions from the account.

The good news here is that if your employer offers a Roth and traditional 401(k) your decision does not have to be binary; you can do some of each. Perhaps you like the idea of the Roth but don't want such a large decrease in your paycheck for cash flow reasons. A 50/50 split between the Roth and traditional may be a good solution. Before making a final decision it is important to consult with your financial advisor about what is most suitable for you and your family.

Do not overlook the potential benefits you have available to you! In my experience, since the Roth has not been available as long as the traditional 401(k) many people wish they had a larger portion of tax free money in retirement. Take the time to evaluate and work with your financial and tax advisors to develop a plan that will help maximize your benefits in retirement.


(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).