The Roth 401(k) is becoming more and more common

Retirement savers, take note: More and more employers have added a Roth savings option to their workplace 401(k) plans.

And due to a change in the law, it is likely that the remaining holdouts will soon offer this as well.

About 93% of 401(k) plans offered a Roth account by 2023, according to an annual survey released in December by the Plan Sponsor Council of America, a trade group for employers.

That’s up from 89% in 2022 and 62% a decade ago, according to the study, which surveyed more than 700 employers with 401(k) plans of varying sizes.

Roth refers to the way retirement savings are taxed.

A Roth is an after-tax account: savers pay taxes on their 401(k) contributions up front but, with some exceptions, don’t pay later when they withdraw money.

In contrast, pre-tax savings are the traditional route for 401(k) plans. Savers receive an upfront tax benefit, deferring their tax bill on investment returns and contributions until later, when they withdraw money.

It appears many aren’t taking advantage of Roth availability: About 21% of eligible workers made Roth contributions in 2023, compared to 74% who made pre-tax contributions, according to PSCA data.

Choosing which type of 401(k) contributions to make — pre-tax or Roth — largely comes down to your current tax bracket and expectations about your future tax rate, according to financial advisors.

You want to choose the one that will keep your tax bill the lowest. In short, it’s a tax bet.

This requires some educated guesswork. For example, many financial advisors recommend Roth accounts for people who are early in their careers, a point at which their tax rate will likely be lower than in the future, when their salaries will almost certainly be higher.

More from Personal Finance:
Number of Millennial 401(k) Millionaires Increases 400%
Biden ends some student loan forgiveness plans
Why the ‘great resignation’ became the ‘great abode’

“We always recommend it [Roth] for someone on a low salary, usually the younger working people,” says Olga Ismail, head of retirement plan advice at Provenance Wealth Advisors.

“It’s the lowest tax bracket you’ll ever be in, so why not take advantage of it now if you can?” she said.

A Roth 401(k) also offers a unique savings opportunity. Roth individual retirement accounts – Roth IRAs for short – have a lower annual contribution limit than 401(k)s and have income eligibility limits. A 401(k) has no income limits. So a Roth 401(k) allows higher earners to directly access a Roth account, and all savers can contribute more money to a Roth account than they otherwise could.

Financial planners also generally recommend diversifying between pre-tax and Roth savings. This offers tax flexibility in retirement.

For example, strategically withdrawing money from a Roth account for income can keep some retirees from asking for higher premiums for Medicare Part B and Medicare Part D. Those premiums can increase with income, but Roth withdrawals don’t count toward taxable income .

Although many people expect their tax rates to decrease in retirement, this is not always the case.

Soon, more savers will likely have a Roth 401(k) option available to them, if they don’t already.

A 2022 retirement law known as Secure 2.0 requires “catch-up” 401(k) contributions to be made to Roth accounts if the employee’s income exceeds $145,000 (indexed to inflation). That rule comes into effect in 2026.

High earners age 50 or older should contribute any additional savings above the annual 401(k) limit to a Roth account, meaning almost all 401(k) plans would likely have to offer Roth accounts, Ismail said.

Employees can save up to $23,000 in a 401(k) by 2024. Employees age 50 and older can save an additional $7,500 in catch-up contributions.

“Offering Roth as an option has become a best practice in recent years,” and because of the mandate for high earners, “we will continue to see Roth become common,” said Hattie Greenan, PSCA research director.

Additionally, Secure 2.0 allows companies to make an employer 401(k) contribution, such as a match with Roth savings. About 13% of employers said they would “definitely” add the option, and another 35% said they were still considering it, according to PSCA data.