Why Offer a Roth 401(k) Option to Your Small Business Employees

Author: Siân Killingsworth / 24 May 2023 / 401(k) Plan Information

If you’re a small business owner, you know that offering a retirement savings plan is an important benefit for your small business’s employees. However, choosing the right retirement plan can be challenging. One option that you may want to consider offering is a Roth 401(k).

What is a Roth 401(k)?

Glad you asked. It is a retirement plan that combines the features of a traditional 401(k) with those of a Roth IRA.

You and your employees can contribute pre-tax dollars like a traditional 401(k), but with a Roth 401(k), they can also contribute after-tax dollars. The after-tax dollars grow tax-free and can be withdrawn tax-free in retirement.

Benefits of Offering a Roth 401(k) to Your Small Business’s Employees

Tax-Free Retirement Income

One of the most significant benefits of offering a Roth 401(k) is the tax-free retirement income it provides. Unlike a traditional small business 401(k), where contributions are tax-deferred, employees contribute after-tax dollars to a Roth 401(k). As a result, the money grows tax-free, and when your employees withdraw funds in retirement, they won’t have to pay taxes on those withdrawals. This can be a significant benefit for individuals who expect to be in a higher tax bracket in retirement.

Diversification of Retirement Income

By contributing to both a traditional 401(k) and a Roth 401(k), your employees can create a retirement income stream that includes both tax-deferred and tax-free income.

No Required Minimum Distributions

With a traditional 401(k), employees must start taking required minimum distributions (RMDs) at age 72–but with a Roth 401(k), RMDs aren’t required. This means that your employees can leave their money in the account to continue to grow tax-free for as long as they like.

Employer Matching Contributions

As a small business owner, you may also be able to offer matching contributions to your employees who contribute to a Roth 401(k). Matching contributions can help incentivize your employees to save for retirement and can also help to reduce your tax liability as an employer.

Attract and Retain Top Talent

Offering a competitive retirement package can help you attract and retain top talent. Retirement benefits are becoming increasingly important to employees. You can set yourself apart from other small businesses by offering comprehensive benefits that allow participants to have more control over their retirements.

Easy to Implement and Maintain

Finally, a Roth 401(k) can be easy to implement and maintain. Most retirement plan providers offer Roth 401(k) options, and the administrative costs are typically low. Another benefit: Because employees contribute after-tax dollars, there are no additional tax reporting requirements for you.

 

 

Ubiquity is not a registered investment advisor and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.