Roth 401(k) plans seem to be the neglected stepchild of retirement plans.
While more employers are adding them to retirement options — Aon Hewitt says 50 percent now provide them compared to 11 percent in 2007 — only 11 percent of workers who have access to one actually take advantage of it.
And it's not just millennials who are missing out on the benefits of Roths, although they're the generation that was supposed to derive the most benefit from the plans since their launch more than 15 years ago.
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A T. Rowe Price study found that no matter what generation and no matter what age, a retiree nearly always had more money in retirement from a Roth 401(k) than from a traditional IRA.
Exceptions do occur when an investor's tax bracket drops by at least 9 percent and the investor is more than 50; then a traditional IRA would be more beneficial. At 65, the tax bracket need only drop by 6 percent to make the traditional IRA pay off better.
However, according to Stuart Ritter, T. Rowe Price senior financial planner, that's not a reason to avoid a Roth. "Since most investors remain in the same tax bracket in retirement, the Roth IRA can generate more spendable income even for an investor who made their contribution at age 65," Ritter said.
The study said that those willing to trade immediate tax deductions for future tax-free income will have more of that income to spend come retirement.
"The benefits of tomorrow's tax-free retirement withdrawals with a Roth IRA far outweigh the benefits of today's tax deduction and other possible benefits with a traditional IRA," said Ritter. "Even though the Roth IRA contribution doesn't qualify for an income tax deduction, decades of compounding tax-free money can generate more spendable income in retirement."
There are other advantages to Roths as well, which the study highlighted.
Among them: savers using Roths have the flexibility to withdraw money before retirement, should a financial emergency make that necessary, without having to worry about taxes and penalties.
A traditional IRA, on the other hand, imposes a 10 percent penalty on withdrawals if the participant is less than 59½ (with some exceptions) and the participant is taxed on the money as well.
Retirees also have the option of either not taking money at all — Roths aren't subject to required minimum distributions the way traditional IRAs are — or taking lots of it all at once if an emergency arises. An overlarge withdrawal from a traditional IRA, however, could push the retiree into a higher tax bracket, boost Medicare premiums and even make Social Security benefits taxable.
Participants can set aside $17,500 in after-tax money a year in a Roth 401(k), or $23,000 if they're 50 or older, no matter what their income.
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