The popularity of Roth savings options in 401k plans is now at an all-time high, according to the Plan Sponsor Council of America (PSCA). The availability has doubled in the last 10-plus years with Roth after-tax contributions now allowed in 86.3 percent of plans, including 91.3 percent of large plans. In comparison, that’s up from 75% in 2019 and 49% a decade ago, according to the non-profit organization’s 64th Annual Survey of 401k Plans.
“The increase in Roth during the last decade is likely a combination of factors as employers look to provide more options to employees – it has clearly become an industry standard in recent years,” said Hattie Greenan, PSCA’s Director of Research and Communications.
Notably, those in plans with 1 to 49 members had the highest contribution rate with more than 42% making the Roth after-tax contribution, compared to almost 26% of participants in all size plans taking a similar action.
Overall, the PSCA report also found that a record number of employees are eligible for and participating in 401k plans, likely spurred by the 2019 SECURE Act provisions.
Though some have taken Roth contributions to the extreme, many workers are becoming enamored with after-tax account because of several features including paying taxes up front on 401k savings, but enjoying investment growth and account withdrawals in retirement, tax-free.
According to the PSCA, the Roth is also becoming a more appealing option for a number of reasons:
- Workers just starting their careers and expect their income tax rate to increase in the future;
- Workers employed in a state that currently does not have an income tax;
- Employees who want to build assets that will not be subject to minimum required distributions;
- If they are potentially limited by the IRS contribution maximum of $18,500 (and the additional $6,000 catch-up maximum for those 50 and older) and know that an equal amount of contributions on a Roth basis represents a significantly greater savings rate;
- Workers who want to manage their taxable payouts in retirement with an eye to avoid Medicare Part B and Part D income surcharges;
- If they are highly paid and therefore not eligible to contribute to an individual retirement account (IRA) on a Roth basis; and/or
- Lastly, they may want to convert taxable monies to a Roth basis today, but they are not currently eligible for a distribution that can be rolled over and converted to a Roth IRA where plans with Roth features can permit in-plan conversions at any time.
“We expect Roth availability to remain commonplace and expect to see an increase in use by participants over time as education around the tax benefits takes hold,” added Greenan. She noted a potential trend is that employers may consider Roth as a default option in automatic enrollment plans.
Lynn Brackpool Giles is a contributing editor to 401(k) Specialist. Giles is a former Managing Director of Communications and Consumer Services for the Financial Planning Association (FPA), where she oversaw all corporate, legislative, and consumer communications. In her current journalistic practice, she is a frequent contributor to numerous financial services industry publications.
