Too Late for A Roth? Think Again…

Do you think you’re too old to enjoy the tax benefits of a Roth account? You might want to reconsider. The Roth account, named for Senator William Roth, was introduced as part of the Taxpayer Relief Act of 1997. It was just getting traction as a valuable savings tool in the early 2000’s, when most boomers and many Gen Xers were launched in their careers and set in their financial ways. 

Unlike a traditional IRA or regular 401(k) plan, you pay the taxes up front when you put money in a Roth account. If you follow the rules of the plan, all the interest you subsequently earn on the investment is tax-free in retirement. By design, the Roth works best for those who contribute early and withdraw late.

Perhaps it is no surprise, then, that fewer older Americans have Roth accounts. For example, the percentage of Vanguard clients with Roth IRAs in 2023 , from 21% at ages 25-34 to 9% at age 65 and older₁. 

One reason cited for this disparity is that many older workers entered the workforce at a time when the Roth did not exist.  Take Chuck and Sheila, for example, a nice couple from Falmouth in their mid-50’s I met with recently while having a bite to eat at the Green Pond Yacht Club. They’ve been saving and investing diligently for over two decades in their company 401(k) plans and individual IRAs. They enjoy their work and don’t plan to retire until age 65, or possibly even later. At this point, they were looking for a second opinion on their portfolio and some tips to help them cross the retirement finish line successfully. 

As we reviewed their assets, I noted that neither one of them had a Roth account. I asked them about this, and they explained that their income was too high for them to contribute to a Roth IRA. They acknowledged that their higher income was a good problem to have, but being familiar with the tax benefits of the Roth, they would love to have it as an option in their plan.

I then explained to them about the Roth 401(k), which has no income restrictions for contributions. For 2024, individuals making upward of $161,000 and married couples filing jointly making $240,000 or more aren’t allowed to contribute to a Roth IRA. However, that doesn’t mean they’re shut out of this valuable tax tool altogether. Here’s where the Roth 401(k) comes in.

We can think of a Roth 401(k) as a hybrid between the Roth IRA and your company 401(k) plan, or the post-tax version of the traditional 401(k). With a traditional 401(k), you get a tax deduction upfront but must pay income taxes on the money you withdraw in retirement. With a Roth account, including the Roth 401(k), your contributions are taxed on the way in, and you enjoy tax-free withdrawals in retirement. This makes them appealing for high-income earners who wouldn’t be able to contribute to a Roth IRA. 

While not all 401(k) plans offer the Roth as an option these days, most do. Roth 401(k)s have been steadily growing in recent years: 89% of retirement plan sponsors offered a Roth 401(k) in 2022, up from 54% in 2012, according to the Plan Sponsor Council of America₂.

Another reason to consider a Roth 401(k): Your money can now grow tax-free for longer. A change in tax law has made it easier to keep your Roth 401(k) intact through retirement while avoiding required minimum distributions, or RMDs. Until this year, retirees had to take RMDs from Roth 401(k)s starting in their early 70s. The Secure 2.0 law of 2022 eliminated that requirement effective in 2024. Now, if you own a Roth 401(k), you won’t have to take RMDs at all, bringing the accounts in line with rules for Roth IRAs. Your money can keep growing for as long as like, and even pass tax free to your heirs. Prior to the new rule, even though you wouldn’t have to pay taxes on those withdrawals, they would still eat into your account balance, chipping away at your heirs’ inheritance.

Chuck and Sheila were happily surprised at this news, and excited to see if their employers were one of the 89% of companies offering a 401(k) option. They acknowledged that, while it may not be fun to pay taxes on contributions instead of enjoying the current tax deductions they’re used to, knowing the government won’t take its cut of their savings later in life would be a significant plus. And anything they didn’t spend in their lifetimes would pass tax free to their family. 

While it’s always better to start investing early, even those saving for retirement in their 50’s can benefit from a Roth account. Too much income? Maybe the Roth 401(k) is the right choice. 

The bottom line is that a Roth account offers benefits for both you and your heirs. And while no investment is right for everyone, you have nothing to lose – and perhaps much to gain – by considering all of your options. 

So as always - be vigilant and stay alert, because you deserve more!

Have a great week.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc.

We do not offer tax or legal advice. Jeff can be reached at jeff@cutterfinancialgroup.com. This information is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject of the article. Different types of investments involve varying degrees of risk, including the potential for loss. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Market data and other cited or linked-to content is based on generally available information and is believed to be reliable. Cutter Financial does not guarantee the performance of any investment or the accuracy of the information contained in this article. Cutter Financial will provide all prospective clients with a copy of Cutter Financial’s Form ADV 2A, Appendix 1, applicable Form ADV 2Bs and Form CRS as well as the firm privacy policy. Please contact us to request a free copy via .pdf or hardcopy.  1. https://tinyurl.com/yd44zana 2. https://tinyurl.com/yum3a484  

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