Do you have a Roth account at work? Employees saving for retirement in workplace 401(k) plans are increasingly choosing the Roth option, according to benefits consultant Aon Hewitt’s 2014 Universe Benchmarks report. When the Roth option is available, 11% of participants contribute to a Roth, up from 9.6% in 2012 and 8.1% in 2011. The report which analyzes the behavior of more than 3.5 million 401(k) plan participants in 140 large employer plans sheds some light into the decision-making process of employees and suggests that more employers should offer the Roth option.
Whether to contribute to a traditional 401(k) or a Roth account is somewhat of a coin toss because there are so many variables, but at least there are some guidelines. When you contribute to a traditional 401(k), you’re contributing on a pre-tax basis, meaning you get a tax break upfront but have to pay taxes when you take the money out in retirement. By contrast, with a Roth account, you pay in with after-tax dollars, and the money you contribute, including earnings, comes out tax-free in retirement.
Some good reasons to go Roth: if you expect your tax rates to be higher in retirement; if you’re young and have decades of tax-free compounding earnings potential; if you plan to leave your Roth to a spouse or heirs who can stretch out the tax-free growth. The decision is much like choosing between a traditional Individual Retirement Account and a Roth IRA, only you don’t have to worry about the pesky income limitations for contributing to a Roth IRA.
So who is making Roth 401(k) contributions? Roths are favored by the young. More than 17% of younger workers (in their 20s) elected to make Roth contributions to their 401(k)s compared to fewer than 9% of older workers (in their 50s). This is consistent with the premise that younger workers benefit more from the Roth option, given that they often have lower wages and corresponding lower tax rates, the Aon Hewitt report says. Here’s the breakdown by age.
Age % of participants using Roth
More Roth 401(k) fans are men—11.9% of male 401(k) participants make Roth contributions (up from 10.2% in 2012) compared to 9.8% of women (up from 8.7% in 2012). By salary, workers earning between $60,000 and $79,000 had the highest Roth usage at 13.6%. Looking at Roth usage by tenure, Roth usage falls as tenure climbs. Some 14.8% of participants on the job for 2 to 3 years make Roth contributions compared to 9.1% of workers with 20 to 30 years of tenure, and 7.6% for workers on the job for 30-plus years.
During the time period with the Roth enrollment bump, the percentage of employers who offer the Roth option has also gone up—from 40% in 2011 to more than half of employers in 2013 (Roth 401(k)s have only been around since 2006). But the burden on choosing the Roth option remains on the employee. When employers default employees into 401(k) plans, the default is the traditional 401(K), not the Roth option. In addition, any employer match goes into the traditional 401(k). So employees looking for tax diversification in retirement may choose the Roth option for employee contributions to balance out the employer traditional contributions. As employers replace traditional defined benefit plans with greater 401(k) matching, the employer match pot that will be taxable will be more significant.
One way employers can increase participation and savings rates is by adding a Roth feature to the 401(k) plan, the Aon Hewitt report says. In 2013, employees who made Roth contributions saved more on average than their non-Roth-using counterparts: 10.3% v. 7.7% respectively.
For 2014, you can contribute up to $17,500 or $23,000 if you’re 50 or older into a 401(k). You can designate the contributions as traditional pre-tax contributions or Roth contributions or a mix of the two. Aon Hewitt found that 6.5% of plan participants contributed the max.
This article was written by Ashlea Ebeling from Forbes and was legally licensed through the NewsCred publisher network.