While Roth 401(k) plans are positioned as ideal for millennials who have yet to hit their peak earnings (tax rates), 40- and 50-somethings who’ve been using a traditional 401(k) for a few decades can add valuable tax diversification by switching over and doing some Roth saving.
“Taxes are the most expensive thing in retirement,” said Hays. “Think about it, you pay 30 percent or so every time you want to access your money.
“The Roth 401(k) is an absolute necessity,” he added. “It allows you to position yourself so you are not forced to access your tax time bomb in retirement when you need money. “
For the record, anyone can contribute to a Roth 401(k). There are no income limits. Employer matching contributions will continue to be made into a traditional 401(k) account.
A common argument for sticking with a traditional 401(k) is that reducing your taxable income this year with your pretax contributions is more valuable to you if your expectation is that you will be in a lower tax bracket in retirement.
Be careful with this assumption. If the bulk of your retirement savings are in traditional 401(k) plans and individual retirement accounts, the RMDs are likely to keep your rate from plummeting, especially once you add in other income sources such as Social Security and, perhaps, a pension.