The number of defined contribution plans (including 401(k), 403(b) or 457(b) plans) with a Roth feature has grown significantly in recent years. Roth 401(k) is gaining popularity due in part to tax hedging or tax diversification strategies. Since the federal and state tax rates that apply at retirement are unknown, a participant can hedge future tax exposure by making at least some portion of his or her retirement savings as Roth 401(k) contributions. Other participants want greater retirement security with a large portion of their retirement savings not subject to income taxes. Some high net worth participants want to pass tax-free investments to their beneficiaries.
Whatever the reasoning, Roth 401(k) is gaining traction in employer-sponsored defined contribution plans. According to a survey of 400 plan sponsors in October 2013, 50 percent offered a Roth option in their 401(k) plans, as opposed to 11 percent only five years earlier. The number of participants with access to Roth features, and the size of their Roth 401(k) balances, should continue to surge following the issuance of new IRS guidance that greatly expands participants’ ability to convert retirement savings to Roth balances.
Originally published in Pension & Benefits Daily.
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