Roth 401(k)s are a bit of a mixed bag. Read on to see why.
If you’re planning to set aside money for retirement savings this year, good for you. It’s important to save independently for your senior years so you’re able to live comfortably once your career wraps up.
Now there are a number of retirement plans you can choose from for housing your savings. And if your company offer a Roth 401(k), which a growing number are these days, you may want to consider it.
That said, Roth 401(k)s can be a bit of a mixed bag. Let’s look at two reasons you should choose this account — and then two reasons you shouldn’t.
1. You can contribute a lot of money this year
In general, 401(k)s offer higher contribution limits than IRAs. This year, you can put up to $23,000 into a Roth 401(k) if you’re under age 50, or up to $30,500 if you’re 50 or older. Compare that to an IRA, which limits you to $7,000 or $8,000, depending on your age, and with a Roth 401(k), you clearly have a lot more opportunity to invest for retirement in a tax-advantaged manner.
As a reminder, Roth 401(k) contributions aren’t made on a pre-tax basis. But investment gains in a Roth 401(k) are tax-free, as are withdrawals in retirement.
2. You won’t have to take RMDs
Required minimum distributions used to be something Roth 401(k) savers faced. Not anymore.
Beginning this year, Roth 401(k)s are not subject to RMDs. Once you reach retirement age, you can withdraw from your Roth 401(k) or not — the choice is yours. And if you decide you want to use your Roth 401(k) as a means of passing down wealth, that option exists.
And now, we’ll consider two reasons a Roth 401(k) may not be your best choice.
1. Your investment choices may be limited
Roth 401(k)s, like traditional 401(k)s, typically do not allow you to invest your retirement savings in individual stocks. Rather, you’re generally limited to different funds to choose from.
That’s not necessarily a terrible thing if you’re more of a hands-off investor. But if you’re someone who likes complete control over your portfolio and knows how to pick stocks, it could be a problem.
2. You could face costly fees
Because Roth 401(k)s generally limit you to different funds, the fees you’re charged, known as expense ratios, can be significant. Also, there are costs associated with administering a Roth 401(k), and those may get passed on to you in the form of — you guessed it — more fees.
All of those fees could eat away at your savings over time. With an IRA, you may find that you’re not spending quite as much money on fees.
All told, there are benefits as well as drawbacks to keeping your retirement savings in a Roth 401(k). If it’s an option that’s available to you, one thing you may want to do is contribute enough to your account to get your full employer match, but then save separately for retirement in an IRA. But if you decide to keep all of your savings in a Roth 401(k), do know that there’s nothing wrong with that, either.
