11 Good Reasons to Contribute to a Roth 401k


I thought I would have a little fun and come up with 11 reasons to contribute to a Roth 401k. Why come up with 11 reasons instead of 10? In honor of the amplifier in “This is Spinal Tap.”

For the young

  1. You are in a low tax bracket today and expect to be in a higher tax bracket in the future. This is commonly the case for people just starting out their careers.
  2. You are young and have more years for the account to grow tax free. Would you rather plan on paying the IRS 25% of that growth eventually or keep it for yourself?

For the seasoned veterans

  1. You are unable to contribute to a Roth IRA because your income is too high. If you make over $133k (single), you cannot contribute to a Roth IRA, but you can contribute to a Roth 401k.
  2. You already have significant traditional 401k/IRA assets. It’s wise to build a mix of tax-deferred (regular IRA/401k), tax-free (Roth IRA/Roth 401k), and taxable accounts. That way you can spread your tax bills wisely across your retirement.
  3. You have a large estate. Roth 401k/Roth IRA assets are the best ones to leave to your heirs. Your children can draw the accounts down over their lifetimes while continuing to receive tax-free growth along the way.
  4. You are in the AMT today and expect not to be in the AMT in retirement (or hope the AMT doesn’t exist then). If you are in the AMT, you may as well make lemons out of lemonade. You only pay a 28% tax rate on the money you contribute today. Lock in that tax-free growth so you don’t pay taxes on this money later at 39.6%.

For everyone

  1. The maximum contributions to Roth 401k and regular 401k are the same. That means maxing out your Roth 401k leads to much higher purchasing power in retirement than maxing out your regular 401k. If you build a $1 million Roth 401k, you get to spend all of it. If you build a $1 million regular 401k, you will need to pay tax on some of it. If your tax rate is 20%, the regular 401k only translates into $800k of spending power.
  2. Your company match still comes in pre-tax (regular) contributions. This gets back to having a mix of different buckets to withdraw from in retirement.
  3. There are no required minimum distributions on Roth IRAs. If you roll your Roth 401k into a Roth IRA before age 70.5, you are not required to spend down the assets in retirement.
  4. You are in a low income tax state (or even better, a no income tax state). It’s possible that you could move to a state with income taxes down the road. I’ve had clients relocate from MN to TX for work and plan to move back to MN for retirement. It’s smart to maximize the Roth 401k contributions in TX to avoid the MN income taxes on that money later.
  5. If something goes horribly wrong and you need to withdraw the money before age 59.5, your tax penalty will be less with a Roth 401k than on a similar withdrawal from a regular 401k. We don’t recommend early withdrawals from any 401k, but sometimes life doesn’t go the way we want it to.

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