If you could offer a benefit to your employees that costs you nothing yet potentially saves them thousands of dollars, would you do it?
Most would say yes. We're talking about the Roth 401(k) provision, but surprisingly, only half of employers have added this feature to their 401(k) plans. We think a big reason for that is lack of information, so let's clear things up.
- Most likely, it won't cost you, your plan, or your employees anything to add this benefit to your existing 401(k) or 403(k) plan. It is a minor administrative change that your plan record keeper/administrator and payroll provider can accommodate. You'll also need to amend your plan document.
- Anyone, regardless of age or income, can make after-tax contributions to a Roth 401(k) account as long as this feature has been added to your plan.
- The big difference is that for employees, there is no upfront tax deduction for a contribution to a Roth 401(k). In exchange, all withdrawals of contributions and earnings are completely tax-free after five years of opening the account until age 59 ½.
- Like a traditional 401(k) account, a Roth 401(k) account has a maximum annual payroll deduction contribution of $17,500. For anyone 50 or older, there's an additional $5,500 “catch up” contribution that brings the total up to $23,000.
- Roth 401(k) and traditional 401(k) contributions are treated the same when it comes to their eligibility to be matched by employer contributions.
What a terrific tax diversification benefit for you and your employees. The Roth 401(k) provides for a lifetime of tax-free wealth accumulation instead of building a large retirement nest egg that will be subject to the prevailing income tax rate when savings are withdrawn in retirement. Roth accounts are also not subject to the Required Minimum Distribution rules and are passed on to heirs income tax free.
We think education is the key to helping employers and employees benefit from Roth 401(k) retirement savings. We encourage all employers to adopt the Roth 401(k) provision to give themselves and their employees powerful tax flexibility at retirement. If you haven't yet done so, it's time to add this valuable benefit to your retirement plan.
Michael Francis is president of Francis Investment Counsel LLC in Pewaukee.