Traditional Accounts Continue Sharing the Stage with Roth Accounts

June 18, 2019

Tax diversity among the benefits

As employers continue looking for ways to help employees retire securely, the Roth account has become a regular plan feature. In the five years starting in 2014, in fact, inclusion of a Roth account feature had increased 18.1%, so that by 2018, 72.7% of 401(k) and 403(b) plans included one. In the largest plans, those with more than $200 million in assets, nearly 8-in-10 plans now include a Roth feature.[1]

A key reason for the Roth’s popularity is diversity—but not the kind typically discussed in retirement plan circles. Instead of investment diversity, the primary reason to include a Roth is tax diversity.

Lower taxes today…or tomorrow? Find a balance

Taxes are one of the (if not the) key reasons to encourage employees to contribute to their 401(k) plan. After all, current-year income may be reduced by the amount an employee contributes to the plan. However, as the discussion around income strategies at retirement heats up, awareness is increasing about the role of income taxes during the de-cumulation, or withdrawal, phase. Retirees whose savings are entirely tax sheltered may be hit with tax bills that are larger than they expect, just at a time when every penny counts. 

Investing part of one’s retirement savings in a Roth account is one way to provide balance. True, Roth contributions are made with after-tax money. Any investment earnings in the Roth account accumulate tax-free just as they do in a traditional 401(k) or 403(b) account. Unlike the traditional accounts, though, withdrawals from the Roth account are tax-free at retirement. 

Tracking the details

There are several questions employers that want to add a Roth feature to their existing 401(k) plan should ask themselves or their providers:

  • Does our plan document allow for a Roth option, or will it need to be updated to include this feature?
  • Is our payroll provider capable of processing both pre- and post-tax contributions?
  • Can our record keeper track both types of contributions?

If your plan includes auto-enrollment, new participants are typically enrolled in the traditional account. If you want to enroll them in the Roth account, you should require them to affirmatively sign up to do so. Employees who contribute to both the pre-tax and post-tax accounts in the plan need to know that the maximum deferral amount considers both.

As is the case with any qualified plan, there are a lot of details to address when making a change of this kind. It’s always wise to speak with your plan’s counsel. In the meantime, you can read more about Roth accounts in 401(k) plans at the IRS website, https://tinyurl.com/IRS-Roth.

The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance, nor as the sole authority on any regulation, law, or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.

MMA New England is a part of Marsh & McLennan Agency LLC (MMA). Securities offered through MMA Securities LLC (MMA Securities), member FINRA / SIPC, and a federally registered investment advisor. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Variable insurance products distributed by MMA Securities LLC.  MMA and MMA Securities are affiliates owned by Marsh & McLennan Companies.

[1] PlanSponsor 2018 DC Survey: Plan Benchmarking, https://tinyurl.com/PlanSponsor-2018-DC-benchmark