The contributions to a Roth 401(k) account are made of after-tax dollars which means that all applicable taxes are deducted from the contributions before they are added to the Roth 401(k) account. The funds in these accounts and the earnings from the investments made from these funds then grow tax free and one doesn’t even have to pay taxes on the qualified withdrawals made from the account. And since the earnings and qualified withdrawals are tax free, one can take advantage of these features and increase their retirement savings with a Roth 401(k) plan.
Some of the ways by which one can increase their retirement savings are as follows.
Contributing to the maximum
The general rule that applies for increasing saving of all 401(k) accounts is that one needs to contribute to the maximum to gain more earnings from these accounts. The same rule applies to the Roth 401(k) account as well. However, an important factor to consider when one wants to increase earning from a Roth 401(k) is that the account is funded by after-tax dollars; this means that the employee’s ‘take home’ pay is considerably lesser than if they would contribute to a traditional 401(k) on pre-tax basis. For individuals in certain tax brackets, this can be very advantageous as they will be taxed while investing but their earnings will grow tax free and even the qualified withdrawals will be tax free. So contributing more translates to more funds in retirement where these funds have grown tax free as well are disbursed tax free.
Assessing one’s tax bracket
One can increase their savings from the Roth 401(k) by proper planning where they make maximum contributions depending on their tax bracket. Since the contributions to the Roth 401(k) are made on after-tax basis, making maximum contributions can significantly reduce one’s ‘take-home’ pay. Hence, assessing one’s tax bracket in the present and in the future and factoring that in the planning becomes almost mandatory when contributing to Roth 401(k) plans. These plans are beneficial to people who expect to be in higher tax bracket in the near or distant future or during retirement. Also, individuals in higher tax brackets who want to contribute more to Roth IRAs but are limited by the lower contribution limits can contribute to Roth 401(k) plan to increase their retirement savings.
Investing properly
Majority of the earnings of a 401(k) plan come from the investments made from the 401(k) account contributions. Hence, it becomes essential to invest these funds properly to increase one’s retirement savings. Roth 401(k) funds can generally be invested in stocks, bonds, mutual funds etc. but one should refer to their plan documentation for better understanding of what they can invest in. The best part with the Roth 401(k) is that no matter how bigger the gains one makes from their investments, they won’t have to pay taxes on them. Hence, one can choose to maximize their investments by investing in high risk – high growth funds or trade stocks (short term) if they are younger and have many years left for retirement. One should bear it in mind though that it is mostly advised against investing more than 10% in stocks of the company they work for.
Investing in real-estate
Roth 401(k) has an added advantage wherein one can invest their Roth 401(k) funds in real estate. It is generally considered that real-estate prices will only go up in the future, especially for popular places. Hence, if done properly, investments from Roth 401(k) in real estate can yield high gains. However, one needs to confirm with their plan provider whether their plan has the provision or not and they should also educate themselves of the rules regarding the same.
Not making withdrawals
One can even save more for retirement with their Roth 401(k) by not making any withdrawals, especially non-qualified withdrawals, from the account. Taking withdrawals from the account leaves the account with fewer funds for investment and since majority of the earnings come from investments, it’s wise to leave the funds in the account for them to grow more. Non-qualified withdrawals must be particularly avoided as they not only leave fewer funds for investment but also attract taxes and penalties wherein one can face double taxation.
By making a rollover
Like the traditional 401(k) plan, Roth 401(k) plans also have the ‘Required Minimum Distribution’ (RMD) feature wherein one has to take them once they reach the age of 70 ½. However, the rollover feature of the Roth 401(k) plan can be used as a way around it. One can rollover their funds to a Roth IRA where there is no RMD compulsion and they can hence continue with their investments and let their money grow even more. One can even consider working past retirement to continue contributing to their Roth 401(k) so that he/she can accumulate bigger retirement savings.
These are just the basic pointer for increasing one’s Roth 401(k) savings and their implementation may present different results for different individuals. One should always refer to their plan documentations like the Summary Plan Description for making more calculated decisions when it comes to their retirement savings. If one does not understand all the financial jargon, he/she can always choose to take help of professionals such as financial advisors or tax attorneys.