Posts Tagged ‘retirement’

Supersize with Roths

October 18th, 2017

If your employer’s 401(k) or 403(b) plan permits employees to contribute “after-tax” to a “Roth” account, you should seriously consider contributing part or all of your “elective deferrals” to your Roth account.  Here’s why:

  •  Your Roth contributions and all earnings accumulated in your Roth account grow 100% tax-free to you.  Earnings on your “regular” 401(k) pre-tax funding will be taxed to you at whatever tax bracket you are in when you draw out 401(k) funds.  So the Roth investment earnings compound tax-free whereas the regular 401(k) earnings are deferred from income tax  until you take 401(k) plan distributions;
  • If you contribute to your 401(k) or 403(b) plan on a pre-tax basis, are you going to save and invest your annual tax savings for retirement, or instead spend it each and every year?  If you contribute $5,000 pre-tax to your employer’s 401(k) plan, and you are in the 15% Federal tax bracket, will you save and invest the $750 in annual tax savings?  Most people will spend their tax savings every year, and later be taxed on their regular 401(k) plan distributions.  A Roth 401(k) provides discipline needed to accumulate tax-free funds for your retirement; and
  •  Distributions from a regular 401(k) plan often dramatically increase the taxes on retirees’ social security benefits – not so with Roth distributions.



  • A person in the 15% or lower bracket (the majority of US taxpayers) does not save substantial taxes each year from pre-tax funding of regular 401(k) accounts.  Funding a Roth 401(k) is almost always the best choice for taxpayers in lower tax brackets;
  • Pastors/ministers who have “opted out” of the social security system are often excellent Roth candidates;
  •  Younger employees with 20-30 years until retirement are also excellent candidates for the compounding of totally tax-free earnings in a Roth; and
  • Employees who envision they will fund their personal retirement years based on income from social security and their 401(k) plan distributions are excellent Roth candidates.  As previously stated, Roth distributions do not create taxes on social security benefits, as regular 401(k) and IRA distributions do.  The receipt of non-taxable Roth distributions plus non-taxable social security benefits may enable a person to retire with a reasonable tax-free cash flow.



Every employer can include a Roth provision in their 401(k) or 403(b) plan document (not available for SIMPLE-IRA plans).  However, the Roth provision require separate plan accounting for the Roth funds and the regular pre-tax plan contributions.  Employer “matches” can not be added to the Roth funds.  Separate accounting for regular and Roth contributions, as well as allocating investment earnings on these separate accounts, adds to the complexity and the cost of plan administration.



We are big fans of Roth funding for the majority of taxpayers.  Consistent and regular payroll-deduction funding of a Roth investment will accumulate to a sizeable account balance after several years.  Your tax-free Roth 401(k)/403(b) distributions coupled with minimally taxed social security benefits can provide millions of Americans with a comfortable cash flow in retirement years.

AccuPay can recommend local retirement plan consultants/administrators who can assist employers with Roth provisions in 401(k) and 403(b) plans.  Call AccuPay at 885-7600 for local experts we recommend to clients.


PayDay is an email communication of payroll news, legal updates and tax considerations intended to inform clients and colleagues of AccuPay about current payroll issues and planning techniques.  You should consult with your CPA or tax advisor before implementing any ideas, comments or planning techniques.

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