The U.S. government is rolling out a Roth option to its retirement plan for nearly 3.3 million employees, and private section Roth plans are expected to increase 29 percent this year. These plans can be very attractive to some employees, depending on their tax situation. Are they worth a look for your company?
Roth accounts differ from tax deferred accounts in several ways. Roth contributions are not tax-deferred, and contributions are made with after-tax dollars. Contributions and investment returns can be withdrawn tax-free once the account holder reaches the age 59-1/2, and as long as the account is established for at least five years.
As a result, Roths may be particularly attractive to younger workers who anticipate both their incomes and taxes to increase, and high-earning employees who anticipate higher income tax rates in retirement. However, tax-free accounts would be a better option if you anticipate your income tax rates to decrease in retirement.
Unlike traditional Roth accounts, Roth workplace plans have high annual contribution limits. For 2013, participants may contribute $17,000, with $5,000 additional catch-up contributions allowed for people over the age of 50. The Roth IRA has a $5,000 limit, with $1,000 additional catch-up contributions allowed. There are no income limits for participants of workplace Roths. Roth IRAs have income limits for couples filing jointly or single filers.
Workplace Roth can also include an employer match program.
A recent survey found that many investors do not understand the difference between Roth accounts and other tax-deferred options. However, the huge popularity of the Roth accounts in federal government may generate interest and growth in Roths among the private sector.