When open enrollment rolls around again at your company, it’s the ideal time to review your benefits and make any necessary changes. Health insurance is a major focus of open enrollment season, but don’t forget that you can check up on other benefits, too – including retirement accounts.
At some companies, employees can opt into a Roth 401(k). While you can switch to a Roth 401(k) at any time, open enrollment is an ideal time to get a more in-depth look at what your company offers.
What is a Roth 401(k)?
A Roth 401(k), like a traditional 401(k), is sponsored by your employer. The difference is that a Roth 401(k) is funded with post-tax money, so you can make withdrawals in retirement without incurring taxes.
Who should open a Roth 401(k)?
If your company offers it, a Roth 401(k) can be an ideal option for someone who expects to be in a higher tax bracket in the future. By paying taxes on your retirement savings now, you can avoid the IRS taking its cut when you’re at a higher bracket.
Income tax is another consideration. Here’s an example:
Some of my New Hampshire clients, or their spouses, work in different states. New Hampshire does not have an income tax, but some of the surrounding states, like Massachusetts and Maine, do have an income tax. If one spouse works in New Hampshire, and the other works in an income tax state, that changes who should open a Roth 401(k.)
In that case, the New Hampshire employee would be better suited for a Roth 401(k), and the other spouse might want to stick with a traditional 401(k). That’s because the New Hampshire employee can pay the taxes now without being hit with an additional income tax.
On the other hand, a traditional 401(k) is funded with pre-tax money, meaning you’ll pay taxes on your retirement distributions. For employees working in states with an income tax, contributing to a traditional 401(k) allows them to reduce their taxable income throughout the year.
Open enrollment preparation
Open enrollment gives you the chance to take a close look at your benefits and make sure you’re receiving the best benefits possible for you and your family. Here are some resources to help you navigate open enrollment successfully:
Roundup: Your Guide to Open Enrollment
Open Enrollment Benefits You Should Know About
How to Make the Most of Open Enrollment
Do you need help planning for your financial future? Contact me today to set up a meeting to talk about your goals.