Should I Offer Employees a Roth 401(k)?

Many employers are now adding a Roth feature to their 401(k) plans, allowing employees to make after-tax contributions that are generally distributed during retirement with no income tax liabilities. A Roth 401(k) plan can offer several tax benefits to employees while serving as a valuable recruitment and retention tool for your business.

Unlike traditional contributions to a 401(k) plan, Roth contributions are not tax deductible, although earnings grow without being taxed. The benefits are almost identical to a Roth IRA but without the income eligibility restrictions.  Depending on an employee’s saving and retirement goals, a Roth 401(k) can offer an attractive way to accumulate both pre-tax and after-tax assets for retirement. However, as with traditional contributions, Roth 401(k) contributions are subject to limitations. They cannot exceed the annual limit, which is $19,000 in 2019 ($25,000 for those over the age of 50).  In addition, these limits are reduced by the amount of any traditional 401(k) contributions made by the employee.

Several factors should weigh into the decision to add a Roth contribution feature to your employee-sponsored plan. Roth 401(k) contributions have several features that require separate accounting, making them potentially more onerous to track and manage. You’ll also need to ensure your payroll system is equipped to handle withholding and reporting after-tax contributions. Finally, you will need to ensure employees have access to the information and resources they need to decide whether to participate.

Adding a Roth feature to your 401(k) can be a rewarding benefit to your employees and business. Contact an Oppenheimer Financial Advisor to learn more about setting up a 401(k) plan with a Roth feature.