Who Should Contribute to a 401(k) as Roth?
When it comes to saving for retirement, one of the most common questions is whether to contribute to an employer sponsored retirement plan such as a 401k, TSP, or 403b, with pretax contributions or Roth Contributions. Both types of contributions help you build savings for retirement, but they work very differently from a tax perspective. Understanding who benefits most from Roth contributions can help to significantly lower the taxes you will pay over your lifetime.
2026 Changes to Catch-Up Contributions
In 2026, catch-up contributions can only be made on a Roth basis. For those aged 50+, you can make a catch-up contribution of $8,000, and increases to $11,250 for those aged 60-63. If you have the extra cash flow to make catch-up contributions, we recommend that you continue to make catch-up contributions even though you cannot make them on a pretax basis. Tax wise, Roth assets are more valuable because they grow tax deferred and are withdrawn tax free.
What Makes a Roth Contributions Different?
Roth contributions are made with after‑tax dollars. You don’t get a tax deduction today, but qualified withdrawals in retirement are tax‑free. This makes the Roth option particularly valuable for people who expect higher taxes later in life either because of income growth, future tax changes, or large required minimum distributions from pretax retirement accounts.
Who Should Consider Roth 401(k) Contributions?
- Younger Savers Early in Their Careers
If you're in a lower tax bracket today than you expect to be in the future, a Roth 401(k) can be a smart move. Paying taxes now at lower rates allows your investments to grow and be withdrawn tax‑free in retirement. This is often a great fit for early‑career professionals with long investment horizons.
- People Expecting Significant Income Growth
If your earnings will likely rise over time through promotions, career changes, or business growth, your future tax rate may also increase. Roth contributions lock in today’s rates and shield future withdrawals from taxation.
- Savers Who Want Tax Diversification
Having a mix of pre‑tax retirement accounts and Roth accounts offers flexibility later. In retirement, you can pull from whichever account keeps you in your desired tax bracket. Many households benefit from building a balance in both types over time.
- Individuals Concerned About Future Tax Increases
Many people believe tax rates may rise in the future, especially as federal spending and debt levels grow. A Roth contribution strategy allows you to pay taxes now and secure tax‑free income later, regardless of what future tax laws look like.
- Those Who Don’t Need the Tax Break Today
If your cash flow is strong and you don’t need the immediate tax deduction from a traditional 401(k), the Roth option might be more appealing. This can be especially true for dual‑income households or individuals with higher savings capacity.
- High Earners Who Want Roth Access
Unlike Roth IRAs, Roth 401(k)s have no income limit. Even high‑income earners who are ineligible to contribute directly to a Roth IRA can build tax‑free retirement savings through their workplace plan.
- Individuals with Pretax Retirement Investments > $1,000,000.
Final Thoughts
There’s no one‑size‑fits‑all answer when choosing between traditional and Roth 401(k) contributions. In many cases, the best strategy is a blend of both. The right choice depends on your current tax bracket, expected future income, and long‑term financial goals. Determining the right strategy can help you significantly lower life time taxes paid.
If you’d like help determining which approach is best for your situation, please reach out to schedule a meeting. I’d be happy to run the numbers and walk through your options.