7 Reasons for Begging Your Employer to Offer a Roth 401(k)

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Alamy Nothing in life is perfect. But when it comes to investment accounts, Roth individual retirement accounts and Roth 401(k) plans are as close as it gets. Roth 401(k) plans offer a combination of benefits and options that is unavailable with any other investment account type. There are at least seven reasons why you need a beg your employer to offer one, if it doesn't have one in place. 1. Tax-Free Withdrawals in Retirement With a regular 401(k) plan, all the good news on income taxes happens on the front end. You get to deduct the amount of your contribution from your taxable income for each year that you put money into the account. That lowers your income tax liability each year that you make a contribution. That arrangement works especially well if you're currently in a high tax bracket. The theory on tax deferral is that you take the tax break now -- when you're in a high tax bracket -- then withdraw the money in retirement, when presumably you'll be a lower bracket. Save big now, pay small later -- fair enough. But where a regular 401(k) is concerned, you're merely deferring your tax liability, not eliminating it. Since your contributions to the plan were tax-deductible when made, and since all investment earnings accumulated in the account since inception have been tax-deferred, any and all withdrawals taken during retirement will be subject to income tax.

A Roth 401(k) is a remedy to this dilemma.

A Roth 401(k) is a remedy to this dilemma. Unlike a regular 401(k) plan, your contributions to the plan are not tax-deductible when made. But just like a regular 401(k) plan, any investment earnings that accumulate within the plan are tax-deferred. Based on these two facts alone, it appears that a traditional 401(k) plan is superior to a Roth 401(k). But here's where a Roth 401(k) makes a radical departure from a regular 401(k): Money withdrawn from a Roth 401(k) plan is completely tax-free, not merely tax-deferred. The only requirements for this status is that you have to be at least 59½ when you begin taking distributions, and you have to have been a participant of the plan for a minimum of five years. While the news on income taxes favors regular 401(k) plans prior to retirement, the advantage shifts entirely to a Roth 401(k) plan when you are retired. And that's the time that it will really count. 2. Income Tax Diversification Tax deferral is probably the main reason why so many people take tax-sheltered retirement plans. It's a way to shield current income from high taxes and defer taxes on investment earnings within the plan.