HR Mavericks

Eddy’s HR Mavericks Encyclopedia

Roth 401k
Need an easy, no-additional-cost benefit to help your employees save for retirement? This post-tax benefit provides your employees a chance to save.

What Is a Roth 401k?

A Roth 401k is a way to make post-tax payroll contributions to your retirement plan. Upon retirement, withdrawals are tax-free (not subject to tax withholdings like a traditional 401k). It operates like a regular 401k plan with the same limits, match possibilities, etc. These amounts are published by the IRS annually. Typically, employees are able to contribute to both Roth and traditional 401ks at the same time. It is important to note that the annual limit is a total for all amounts contributed. For example, in 2023 the limit is $22,500, so an employee is able to contribute any combination of Roth and Traditional 401k up to that max.

How Does a Roth 401k Benefit Employees?

401ks in general are a great tool for employees to save for retirement, but Roth 401k plans provide additional benefits.These may not be for everyone, so always recommend that employees talk with a financial expert. In general, here are the benefits Roth plans offer.
  • Retirement savings are taxed now. Assuming that your tax rate is more during your “working” days than it will be in retirement, this is a tremendous tax saving.
      • For example, an employee making $89,000 annually would only be taxed 22%. As that employee continues to earn more, their rate could jump to over 32%.
  • A dollar contributed is a dollar upon retirement. As opposed to a traditional 401k, where the contributions are taxed upon withdrawal, employees are paying the taxes now, so a dollar stays a dollar upon retirement.
      • $1,000 of Roth 401k monies would be paid out at $1,000 plus any earned interest. In a traditional 401k, $1,000 would be paid out minus taxes, so the employee paying 32% taxes would receive $680 plus any earned interest.
  • 401k vs. IRA. The contribution limits for employee 401k plans are the same whether it is traditional or Roth. These limits are much higher than post-tax IRAs (Individual Retirement Accounts). IRAs have a $5000 annual maximum contribution, and employees who earn above a certain threshold are unable to contribute at all.
  • Help for the future. Roth 401k accounts down the road will possibly reduce Medicare costs (which are considered non-taxable income) and prevent minimum distributions as required by some traditional 401k plans. Employees will not have these funds counted as part of their income.
  • Avoid Required Minimum Distributions (RMD). Traditional 401k plans have a requirement that upon a certain age, employees must start receiving a distribution from the plan. Roth 401k plan participants can avoid the RMD by moving their monies to a Roth IRA. This allows the money to continue to be invested without the distributions.

How Does a Roth 401k Benefit Employers?

Employers want to provide the best possible benefits package for staff. Adding a Roth 401k typically does not increase costs and can help the growing presence of younger Millennials and Gen Z in the workforce prepare for their futures.
  • A greater benefits package. Typically, Roth plans can be added to your retirement plans with no added expenses. This becomes a good retention tool for employees.
  • Encourage your employees to save for retirement. Despite the continued push of 401k plans, as of 2020 only 67% of employees had access to a retirement account. Only 55% of non-retirees have a 401k savings plan, and an astonishing 25% have no retirement savings at all.

What Is Employer Matching?

Employer matching means that your organization contributes a certain amount to employees' retirement savings plan (matches their amount, although this does not necessarily mean a 1:1 matching) based on the amount of employees' annual contribution. Matching funds are always pre-tax contributions. This means that corporate 401k plans have two separate accounts: employees' contributions go to their Roth account, and the company matching contributions go to a traditional 401k.

How to Get Started Offering Roth 401ks to Employees

Adding a Roth 401k benefit should be a painless process. The company who manages your current retirement accounts will do the heavy lifting; you'll just need to review documents and support your team to understand the new benefit.

Step 1: Reach Out to Your 401k Provider

This should be an easy step. Just reach out to your 401k provider and ask about adding a Roth 401k option to your plan.

Step 2: Review the Necessary Documents to Add the Plan

Ensure a thorough review of the necessary documents and have the plan administrators sign off.

Step 3: Educate, Educate, Educate

Dedicate time and energy to talking to your employees about what this means to them and why they should take advantage of this benefit. If your 401k provider or broker provides assistance with education, take advantage of that. Open enrollment is a good time to talk about this new benefit.

Step 4: Ensure Payroll and 401k Submission Is Set

Work with your payroll team to ensure that there is a separate deduction code established that handles the post-tax collection of the 401k. These funds need to be sent as different monies to your 401k provider. They will establish accounts for employees who elect Roth vs. traditional 401ks
Ben Madden PHR SHRM-CP

Ben Madden PHR SHRM-CP

Ben has been in the HR profession for almost 20 years. He has been a consultant creating and developing HR departments as well as running his own department for the last 12 years. Ben has a deep understanding of benefits, compliance and org development.
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