A Roth 401k allows investors to be entitled to the entirety of the money inside the account. However, like any investment, there are advantages and disadvantages to this type of retirement plan. In this article, 10 experts weigh on whether or not a Roth 401(k) a good choice as a retirement savings vehicle.

A Roth 401k’s Is An Excellent Vehicle For Future Tax-Diversification And Estate Planning

“Roth 401ks are an excellent vehicle for future tax-diversification and estate planning. Most individuals are unaware that their company might provide this option. Individuals with high incomes have been led to believe that they are not eligible for such a plan. Although you pay your taxes up-front with a Roth 401(k) and it feels significantly more painful, this tool can help alleviate your required returns during your retirement years. During retirement, if you only have traditional 401(k) savings, ALL your distributions will be taxed at ordinary income. So if you are in the 25% tax bracket, and you earn 7%, your net return is only 5.25% without account for investment fees. For the individuals who had success accumulating money in their traditional 401(k), the distributions will likely put them in a tax bracket that will subject their social security income to taxes as well. The Roth 401(k) can help reduce future tax liability and allow retirees to better control their tax bracket. For those of significant wealth, ROTH 401(k) accounts that get rolled into ROTH IRA can also add value to one’s estate plan. Inherited IRA’s are subject to required minimum distributions as opposed to ROTH IRA’s that allow for ultimate deferral and capital appreciation. The beauty of the Roth 401(k) is that when the money is in, you know it is 100% your money and your legacy money.”

Thanasi Panagiotakopoulos, Principal, LifeManaged

Using A Roth 401k As Part Of A Larger Strategic Plan Is A Good Choice

“I would suggest that a Roth IRA is one of several good tools for which to save for retirement. Each situation is different and each individual has different goals, but using a Roth as part of a larger strategic plan is a good choice. If an individual is not concerned with deferring taxes during the working years, I recommend contributing to a Roth up to the IRS limits annually. If the individual is concerned with taxes on income during the working years, I would recommend using the Traditional IRA and contributing up to the IRS limits annually.

In addition to the Roth, I also recommend that an individual strive to contribute to his or her 401k/403b up to the IRS limits on an annual basis. The combination of these two accounts (the Roth IRA and the 401k) provides a level of tax-free growth and tax-deferred growth respectively. In addition to these accounts, a strategic financial plan should also include the use of a Health Savings Account. This account can morph into a second retirement account after the individual turns 65 years old. So long as the individual remains health up to and beyond his or her 65th birthday,
the money held within an HSA can be withdrawn, without penalty, to be used for any reason. Taxes will still be due, but the money is no longer restricted to healthcare expenses and will not incur the 20% penalty for early withdrawal.

The Roth IRA is a useful tool, but it shouldn’t be the only tool used to save for retirement. I suggest that an individual should utilize every resource available to him or her so that social security is a bonus instead of the main source of retirement assets.”

Ken Rupert, Founder, Financial Black Belt Academy 

Tax Benefit And Emotional Toll

 “If you’re investing consistently every month-whether it’s in a Roth 401(k), a traditional 401(k) or even a Roth IRA-you’re already on the right track! The most important part of wealth building is consistent saving every month, no matter what the market is doing. But if I’m choosing between a traditional 401(k) and a Roth 401(k), I’d go with the Roth 401(k) every time! Here’s why:

Tax Benefit

It may be tempting to delay paying taxes so you can get slightly more in your paycheck now. I get that. But think about it this way: You’re already doing the hard work of saving for retirement. If you can get that money to go even further, wouldn’t you want to take advantage of that opportunity? I don’t know about you, but I want to make that money go as far as I can. Here’s another thing to consider: No one can know how the tax brackets or tax percentages will change in the future, especially if you’re still decades away from retirement. Do you want to take that risk? I don’t.

Emotional Toll

Like it or not, it’s hard to separate emotions from investing. Imagine getting to your retirement years and watching your $1 million-dollar nest egg reduced to less than $800,000 because of taxes! I don’t know about you, but I’d much rather pay taxes now than see all that money fly out of my hands later. I’m going to miss $100,000 a lot more than I miss a $100 on a paycheck now. I promise, if you can get into the habit of contributing 15% of every paycheck to your Roth 401(k) early on, you won’t even miss the money you’re paying in taxes. And when you get the retirement, you’ll be glad you don’t owe the government part of your hard-earned nest egg.”

Chris Hogan, Author, http://www.chrishogan360.com

A Roth 401K Allows An Employee To Contribute To This Plan, But The Contributions Are Made On An After-Tax Basis

“The Roth 401K is now offered as a choice with many company retirement plans. My clients often ask whether or not they should choose a traditional 401K as opposed to a Roth 401K. There are some similarities and some key differences. A traditional 401K is deducted from your salary on a tax-deferred basis. The investment and the earnings continue to grow on a tax-deferred basis, but once you reach age 70 ½, you need to start taking Required Minimum Distributions, or RMDs, and these are taxable as ordinary income in the year you receive them.

A Roth 401K allows an employee to contribute to this plan, but the contributions are made on an after-tax basis. The investment and earnings grow on a tax-deferred basis, and like the traditional 401K, you are required to take RMDs once you attain age 70 ½. The difference is that the distributions provide tax-free retirement in income.

When an employee is faced with choosing between these two investment vehicles, the important thing to consider is the tax bracket that they are currently in, and the tax bracket that they will be in once they begin taking distributions. If the tax bracket is currently lower than what is expected in retirement than the Roth 401K makes the most sense. If the tax bracket in retirement is expected to be lower than the current tax bracket, then it makes the most sense to choose a Traditional 401K plan.

Most people don’t know what the future will bring, but many people will actually be in a lower tax bracket in retirement, and should use a Traditional 401K because they can lower their taxable income now, and use the tax savings to invest in their retirement portfolio. Some very high-income earners who expect to be in the same tax bracket may prefer a Roth 401K since it provides tax-free income when distributions are taken.”

Patti Hughes, Owner, Lake Life Wealth Advisory 

A Roth 401k Is Suitable For You Or Not, Will Depend On Two Things

 A Roth 401k has not much difference from a traditional 401k except your contributions are paid post-tax. This simply means that when you make a withdrawal from the account when it’s time to retire, you won’t pay taxes for that.

Whether a Roth 401k is suitable for you or not, will depend on two things.

1. The tax bracket at retirement if you are going to be in a higher tax bracket before retirement, then a
Roth 401k is most suitable for you. But a lower tax bracket will mean you pay more in taxes if you’re operating a Roth 401k.

2. Changing jobs. The transition between jobs necessitates that you move your money from your Roth 401K into another investment tool. This transition could mean losses. How so? If for example, you wish to move your money from a Roth 401k into a traditional 401k, you won’t lose any of the tax benefits you have earned. However, you will be taxed for the movement of those funds. If you change jobs and decide to move your funds into an IRA, you will lose the tax benefits you have earned.

Considering these two factors, a Roth 401k is not really a good option when looking forward to retirement. The uncertainty of the current job market could put you in a vulnerable situation should it happen that you change jobs and consequently find yourself in a lower tax bracket.

 Edith Muthoni, Chief Editor, Learnbonds.com

Roth 401ks Are A Great And Underutilized Savings Option

Roth 401ks are a great (and underutilized) savings option, but they are not a great option for everyone.

Folks in the lowest tax brackets (10% or 12%) are seeing very little tax benefits for contributions to traditional 401(k)s, so the Roth 401(k) options will be the better long-term option.

For those in the middle brackets (22% of 24%), there is more of an argument between the two options. In these cases, I’d lean towards using the Roth 401(k) if income trajectory is trending higher and other tax-deferred accounts have been established. I’d lean towards traditional 401(k) if cash flow is a struggle.

When one is in the highest brackets (32% and above), the tax deferral provided from the traditional 401(k) is hard to beat. I’d avoid Roth 401(k)s in these brackets.”

Mark Wilson, APA, CFP(r), President, MILE Wealth Management

A Roth 401(k) Is A Lot Better Than Speculating In The Market With Tax Dollars

As far as retirement plans go, the Roth 401(k) is a lot better than speculating in the market with tax dollars using its traditional counterpart. Pay your taxes and be done with it. On the back end, everything is tax-free.

Of course, there’s a catch (isn’t there always?). Typically, there are fewer investment options inside a Roth 401(k) than, say, an IRA. Withdrawal rules are also pretty strict. Unless you become disabled, you can’t really get at the money until age 59 1/2. Even then, the account has to have been open for at least 5 years. Other than that, Roth 401(k) plans expose you to the same types of investment risks as any other non-guaranteed investment accounts, so have a financial planner calculate your risk capacity (the amount of risk you can afford to take in your investments) as an investor and only invest money you can afford to risk.

Bottom line: The tax advantages of Roth 401(k) plans might be worth it, but only invest money you can afford to risk and don’t exceed your risk capacity.”

David Lewis, Owner of Monegenix® 

Deciding Whether Or Not To Go With A Roth 401k Over A Traditional 401k Depends On the Individual’s Need

 Roth 401(k)s can be an incredible place to hold stocks, real estate, or any investment for that matter. To hold a Roth 401(k), you must be a participant in a company or Individual 401(k) plan. Also, the Roth feature only applies to the employee contribution to the 401(k), but not the employer portion. Understanding the specific characteristics of the Roth is central to deciding on whether it is right for you.

Let’s start with the disadvantages.

The time value of money. By making contributions to a Roth 401(k), you are forgoing any tax deductions for those contributions. In other words, you are paying the taxes up-front. Economics teaches us that money is worth more now than it will be in the future. So why would you want to pay the taxes now instead of deferring them to the future? (Keep reading and the answer may reveal itself as an advantage).

Losses. If you invest poorly, not only are you losing the principal investment, you are also losing the tax advantages that you were hoping to enjoy in a Roth 401(k). Furthermore, if you do a Roth “conversion” and then experience losses, you are paying taxes on a larger value than you currently have. With a traditional 401(k), you only get taxed on the end value of your distributions. In previous years, you could “recharacterize” or “undo” your Roth conversion before your next tax filing which mitigated some of the risks with immediate losses incurred after the conversion. However, the IRS removed this option in 2019, so once your conversion has been processed, there is no going back.

Now, the advantages of Roth 401(k)s.

Gains. Anything that happens inside a Roth 401(k) happens Tax-FREE. Not tax-deferred. Tax-FREE. That means that if you invest well, you ELIMINATE 100% of the taxable gains. Going back to the example of the time value of money above, maybe it isn’t such a bad thing to pay taxes up-front if you pick the right investments and can eliminate all of the “future” taxes that would have been owed under a Traditional 401(k) account.

Tax Rate Changes. If tax rates go up in the future, Traditional 401(k)s are subject to these changes at the time of the distribution. However, Roth 401(k)s have already been taxed, so as long as the distribution rules are followed (over 59.5 age and have had the Roth 401(k) for at least 5 years), distributing from a Roth will be tax-free, no matter how much the rate has increased.

Estate Planning. There are no Required Minimum Distributions. With Traditional 401(k)s, you must begin removing money from your 401(k) at age 70.5. For estate planning purposes, especially for those who do not need the money in retirement, this gives you the ability to pass on a huge tax advantage to your heirs. While your beneficiaries must begin removing the money upon inheritance, the amount they are required to remove will be based on their life expectancy. So, the younger the beneficiary, the longer they have to keep the money in a tax-free status.

Most investors know that a Roth 401(k) can hold traditional stocks, bonds or mutual funds. Most people do not realize that through a Self-Directed 401(k) custodian, a Roth 401(k) can hold other non-traditional or alternative investments, such as Real Estate, Notes, and Private Placements as well. This type of investing is particularly attractive to investors who have already invested in, say, real estate with their non-retirement or personal funds. A self-directed retirement account just lets them choose what to invest in and all the same rules apply. Regardless of what type of investment you are interested in, understanding the advantages and disadvantages of a Roth in holding these investments is key.

Deciding whether or not to go with a Roth 401(k) over a Traditional 401(k) depends on the individual’s need for current tax deductions, possible estate planning purposes, and most importantly, their investment returns. Unfortunately, returns are much harder to anticipate than the first two factors. It is always best for clients to discuss these factors with their Financial Advisor and/or CPA.”

Brandon Hall, Executive Vice President/Chief Operating Officer, Midland Trust Company

 Higher Contribution Limits And No income Restrictions Placed On The Contributors 

“A Roth 401(k) is a great choice for most people as a retirement savings vehicle. If you have the option to contribute to a Roth 401(k) through an employer, you should strongly consider doing so. The main two reasons being 1) The higher contribution limits than a regular Roth IRA and 2) No income restrictions placed on the contributors.

In 2019, you can contribute up to $19,000 a year to a Roth 401(k) (or $25,000 if you’re 50 or older). Roth IRA (like all IRA) contributions are capped at $6,000 per year (or $7,000 if you’re 50 or older). In 2019, you can contribute to a Roth IRA only if your modified adjusted gross income is less than $137,000 (single) or $203,000 (married filing jointly); whereas, you can contribute to a Roth 401(k) regardless of your income.

With a traditional 401(k) retirement plans work, employees contribute pre-tax dollars and those contributions and earnings grow tax-deferred until they are withdrawn—preferably in retirement—at which time both contributions and earnings are taxed. With a Roth 401(k), contributions are made with money that has already been taxed (similar to a Roth IRA); thus, your earnings grow tax-free, and you will pay no taxes when you start taking withdrawals in retirement.

Additionally, you can withdraw your cost basis (the entirety of your original contributions) tax-free and penalty-free from a Roth 401(k). Only the gains in your account would be subject to taxes and (potentially) a 10% penalty.

Owning a Roth 401(k) gives you lots of flexibility with your retirement income. If you own a traditional 401(k), you’ll have to take RMD’s (Required Minimum Distributions) when your turn 70½ or you’ll be heavily penalized. However, by owning a Roth 401(k), you can rollover your entire account into a Roth IRA and avoid RMD’s altogether, allowing your savings to continue growing tax-free.

Ultimately, tax considerations are a major factor in determining when and how to contribute to a Roth 401(k). While we cannot predict what tax laws will look like in the future, using a Roth 401(k) account in addition to other retirement savings can create the flexibility and diversification to help you maneuver your money efficiently with the ever-changing tax codes.”

Schimri Yoyo, Financial Advisor and Contributor, ExpertInsuranceReviews.com

With A Roth 401k, You Won’t Owe Taxes Upon Withdrawal On Either The Principal Or The Gain/Income

“The benefit to a Roth 401(k) is that you pay taxes upfront and then never pay taxes again. This means you won’t owe taxes upon withdrawal on either the principal or the gain/income. Many smart investors do utilize a Roth 401(k) for this purpose. It allows them to pay taxes when they will likely be taxed at a lower rate, as most people end up in a higher tax bracket upon retirement. In addition, nobody knows what taxes will look like when they retire, so a 401(k) provides a certainty in how much taxes will be withheld upon contribution. This therefore minimizes risk. 

Further, many 401(k) programs, since they are employer sponsored, offer a match. Many employers will offer 50 to 100 percent match on first 6 percent contributed to a 401(k). As such, that’s an added benefit over an
IRA and provides an instant return on your investment that you can access in retirement.

Whereas Roth IRAs have yearly contribution limits of $6,000, a Roth 401(k) has a much higher limit of $19,000, or $25,000 if over 50. This allows you to set aside a higher amount towards retirement each year by utilizing a Roth 401(k). Additionally, a Roth 401(k) has no income limits, while a Roth IRA does, meaning you can contribute to it no matter how much or little you earn.

Another key benefit of a Roth 401(k) is it can help lower gross income as viewed by the IRS, which can help lower retirement expenses. A lower income in retirement will lead to less taxes paid on Social Security benefits and lower cost for Medicare premiums tied to income.”

Chase Lawson, Personal Finance Expert/Author, Financial Freedom: Breaking the Chains to Independence and creating Massive Wealth

There are advantages and drawbacks to every investment, and a Roth 401k is no exception to that sentiment. If you are interested in this type of retirement savings vehicle, factor in what the experts have touched upon in this article, consult with a financial professional, and always do your due diligence before making investment choices.

Sarah Bauder

Sarah Bauder is a financial writer with over a decade of experience at numerous online publications, writing about alternative investments, retirement, US politics, world economy and more.
Sarah Bauder