Are Roth Options Right for You, 401(k) Savers?

Usage of Roth options have significantly grown over the past decade. The
availability of having Roth offered increased to about 63 percent of plans in 2016
in comparison to only around 30 percent in 2007. These results were obtained
from a recent survey of Profit Sharing and 401(k) Plans by the Plan Sponsor
Council of America (PSCA).

The survey looked deeper into the availability and usage of Roth through plan
group size which ultimately increased. “7.2 percent of plans added Roth as an
option in 2016 with the largest increase at 11.2 percent for plans with more than
5,000 participants”.

The results also revealed that one to 49 participants are using Roth options at a
higher rate than any other group. Within the smallest plan group size,
approximately 30 percent of eligible employees are making Roth contributions.

Since Roth became available 12 years ago as an option to ready-made pre-tax
contributions such as 401(k) or 403(b), “Roth features have demonstrated their
value,” says PSCA executive director, Jack Towarnicky. He goes on to explain a few
scenarios in which Roth options are preferable compared to pre-tax
contributions.

Therefore, Roth contributions can be mainly suitable for employees who:

• are young investors starting out in their careers as they are currently in a
lower marginal income tax rate
• seek tax diversification as a hedge against possible elevated income tax
rates
• are employed in a state that doesn’t have income tax
• are highly paid and ineligible to contribute to an IRA on a Roth basis
• are limited by the contribution maximum of $18,500 and/or the catch-up
contribution maximum of $6,000 and know that an equal amount of
contributions on a Roth basis brings a greater savings rate
• Want to manage taxable payouts in retirement with reference to avoiding
Medicare Part B and Part D income surcharges

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