Why More Retirement Plan Sponsors Are Adding Roth Contribution Options
By adding tax-free retirement savings alongside traditional pre-tax contributions, plan sponsors can create a more flexible, attractive benefits package that helps employees build more financially secure retirements.
The better the benefits package, the better positioned retirement plan sponsors are to help employees achieve financial security and build stronger futures.
One of the most impactful ways to boost an employee benefits package is by offering Roth retirement savings options alongside traditional pre-tax contributions.
This dual approach gives employees the flexibility to choose the tax treatment that best fits their individual circumstances and retirement goals. Here's why you might consider adding a Roth after-tax option to your retirement plan.
Qualified withdrawals are tax-free under a Roth retirement plan.
A Roth option allows employees to make after-tax contributions to their 401(k) or 403(b) account. Unlike traditional pre-tax contributions that reduce current taxable income, Roth contributions are made with dollars that have already been taxed. So qualified withdrawals from Roth accounts are tax-free, including any investment growth accumulated over the years, as long as the Roth account has been in existence for 5 years. Then, upon your retirement after age 59 1/2, death or disability, the qualified distributions are tax-free.
This creates a powerful tax diversification strategy, allowing employees to split their contributions between traditional pre-tax savings (which provide immediate tax relief) and Roth after-tax savings (which provide tax-free income in retirement).
No mandatory withdrawals mean continued tax-free growth with a Roth retirement plan.
While traditional 401(k) participants must begin taking required minimum distributions at age 72, Roth 401(k) accounts have no such mandate. This flexibility allows employees to leave their funds invested and growing tax-free for as long as they choose, enhancing their long-term wealth accumulation. This feature also makes Roth savings more appealing to employees who don't expect to need all their retirement funds and plan to leave tax-free assets to their beneficiaries.
Roth retirement plan options can help strengthen your competitive edge as an employer.
Your benefits package can make or break your company's ability to attract and retain skilled employees. By providing both traditional and Roth contribution choices, you can demonstrate your commitment to employees' financial health and give them personalized pathways to retirement security.
For younger workers in lower tax brackets, Roth contributions are attractive because they can pay lower tax rates now in exchange for tax-free withdrawals later when they may be in higher brackets. Over the years, this tax-free growth potential can be significant.
Beginning in 2025, employers may need a Roth retirement plan option since certain high-wage earners will be required to defer any catch-up contributions under a Roth plan.
Adding Roth options to your existing retirement plan is easier than you may think. Since employees make Roth contributions with after-tax dollars that have already been subject to payroll taxes, there are no additional tax reporting obligations or compliance requirements beyond standard record keeping.
Learn more about catch-up contributions.
Empower your people — and your retirement plan.
Enhancing your plan with Roth options is one of the easiest upgrades you can make to strengthen your retirement plan's value and appeal.
Not sure where to start? Contact an ADP retirement services specialist or call us today at (800) 432-401K.
ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor.
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