There's a big employee benefit you're probably missing out on: the Roth 401(k), sister to the standard 401(k).
Over half of employers offer both options these days, according to the advisory firm Willis Towers Watson, yet less than 10 percent of employees on the receiving end are taking advantage of the Roth. That number should be higher.
For some workers, particularly young ones, the Roth 401(k) isn't just the sister to the 401(k), it's Cinderella: It imposes Roth IRA tax treatment on the standard version, which means contributions aren't made pretax as they are to the traditional 401(k). But they can be withdrawn along with investment earnings tax-free in retirement, whereas traditional 401(k) distributions are taxed as income.
That's of particular benefit if you have a decent stretch of career still ahead of you, and you think your salary is likely to rise during it. If you're in a lower income tax bracket now than you expect to be in the future, contributions to the Roth lock in that low rate.
When you contribute to the standard 401(k) pretax, you're not eliminating taxes. You're kicking them down the road until retirement, when you'll pay income taxes on the money you withdraw (and you must start required minimum distributions by age 70½ at the latest. With a Roth 401(k), you can roll the account over to a Roth IRA and avoid the minimum distribution requirement).
There's a significant difference between the pretax contributions to a traditional 401(k) and the after-tax contributions to the Roth version, which may be one reason why Roth 401(k)s lag in popularity: The after-tax deferral takes a bigger bite out of your paycheck. But depending on your income, the difference may be minimal: On a $40,000 salary, for example, 4 percent contributions to a traditional 401(k) would save you about $25 a month in taxes.
When you're at the peak of your salary climb, you may already be at a high marginal tax rate; electing the Roth option at that point could mean overpaying vs. what you'd owe in retirement.
You can't tell the future, but you can split the difference — by making contributions to a Roth 401(k) early in your career, then opting for the traditional version as your salary starts to top out. (Many employers will also let you split contributions if you'd like, so some goes pretax, some post.)
That'll give you at least two pots of money to pull from in retirement, with different tax treatments.
Arielle O'Shea is a staff writer at NerdWallet, a personal finance website. E-mail: aoshea@nerdwallet.com
