Understanding Roth vs Traditional 401(K): Helping your Employees Make the Right Choice
Retirement planning can be overwhelming—not only for employees but also for the employers who support them. Two of the most popular retirement savings options are Roth and Traditional 401(k) plans. But what sets them apart? And how can you, as a business owner, guide your employees toward making informed decisions?
This guide breaks down the key differences, weighs the pros and cons, and explains how offering both options can benefit your employees and your business. By the end, you’ll see why partnering with Maxus Plan Solutions is the smart choice for creating effective retirement plans.
Roth vs. Traditional 401(k): What’s the Difference?
The primary difference between a Roth 401(k) and a Traditional 401(k) lies in how contributions and withdrawals are taxed.
- Traditional 401(k): Contributions are made pre-tax, reducing an employee’s taxable income in the current year. However, withdrawals during retirement—including earnings—are taxed as ordinary income.
- Roth 401(k): Contributions are made with after-tax dollars, meaning employees don’t receive an upfront tax break. However, qualified withdrawals in retirement (including earnings) are entirely tax-free.
This distinction has significant implications for how employees plan their retirement savings and manage their tax strategy over time.
Pros and Cons of Traditional 401(k)
Pros:
- Immediate tax benefits: Employees lower taxable income in the current year, providing immediate financial relief.
- Best for high earners: Employees in higher tax brackets may benefit from deferring taxes until retirement when they might be in a lower bracket.
- Employer matching: Employer contributions are also tax-deferred, further enhancing the plan’s value.
Cons:
- Future tax burden: Retirees may face higher taxes on withdrawals, particularly if tax rates rise.
- Limited flexibility: Employees anticipating significant retirement income may end up with higher overall tax obligations.
Pros and Cons of Roth 401(k)
Pros:
- Tax-free retirement income: Qualified withdrawals are not subject to taxes, providing financial peace of mind.
- Flexible tax strategy: Diversifying savings with Roth and Traditional contribution allows employees to manage taxes more effectively.
- Ideal for younger employees: Workers in lower tax brackets can benefit from paying taxes upfront and avoiding taxes on decades of growth.
Cons:
- No immediate tax break: Contributions don’t reduce current taxable income, which can feel like a drawback for employees seeking immediate relief.
- Higher tax impact for high earners: Employees in a higher tax bracket today may find this option less advantageous.
Which Plan Is Right for Your Employees?
Choosing between a Roth and Traditional 401(k) depends on employees’ unique financial situations and goals. Here are some scenarios:
- Younger Employees: Roth 401(k)s are ideal for employees early in their careers and in lower tax brackets. These employees can maximize decades of tax-free growth.
- Mid-Career Professionals: A combination of Roth and Traditional contributions offers a balanced tax strategy.
- Near-Retirement Employees: Traditional 401(k)s can reduce taxable income during peak earning years, making them a more attractive option.
As an employer, offering both options empowers employees to customize their retirement savings strategy to fit their needs.
How Employers Benefit from Offering Both Options
Providing both Roth and Traditional 401(k) options is more than just good practice—it’s a strategic business decision.
- Attract and Retain Talent: Diverse retirement options demonstrate your company’s commitment to employee financial wellness, making your business more appealing to top talent.
- Increase Participation Rates: Employees are more likely to enroll and contribute when offered options that align with their financial goals.
- Boost Employee Satisfaction: Guiding employees through complex financial decisions fosters trust, loyalty, and morale.
Why We Should Work Together
At Maxus Plan Solutions, we specialize in helping businesses like yours create retirement plans that work—for you and your employees.
- Customized Plan Design: Whether you’re setting up a Roth 401(k), a Traditional 401(k), or both, we’ll guide you through the process and ensure compliance with IRS regulations.
- Employee Education: We coordinate with your financial advisor and recordkeeper to make sure employees receive access to helpful resources, without overstepping our role.
- Ongoing Support: From administration to compliance, we handle the details so you can focus on running your business.
By partnering with Maxus Plan Solutions, you’re not just offering retirement plans—you’re demonstrating your commitment to your employees’ future.
What you Need to Know
Helping your employees decide between Roth and Traditional 401(k) plans is a critical step in setting them up for financial success. By offering both options, you empower your team to take control of their retirement savings in a way that aligns with their unique goals and circumstances.
Let your team know that resources are available through your advisor and recordkeeper to help them learn more about each option and make informed choices.
Ready to take the next step? Contact Maxus Plan Solutions today to learn how we can help you design and implement a retirement plan that sets your business and your employees up for success.