Employees at organizations that offer these plans should consider joining the Roth bandwagon if they expect to be in a higher tax bracket in retirement than they currently are, especially if they’re highly compensated. Here are answers to FAQs about employer-sponsored Roth accounts.

What Is a Roth Retirement Plan?

Employer-sponsored Roth plans — including Roth 401(k), Roth 403(b) and Roth 457(b) accounts — have been around for years. They became available in 2006 under the Economic Growth and Tax Relief Reconciliation Act of 2001 and were made permanent (and enhanced) by subsequent legislation. Currently, about 90% of employers now offer Roth versions of retirement plans to their employees.

Similar to a regular 401(k) plan, an eligible employee can elect to contribute part of his or her salary to a separate Roth account, subject to the generous annual limits. The company may also provide matching contributions based on a percentage of an employee’s salary.

For 2023, a participating employee could contribute up to $22,500 in elective deferrals ($30,000 for employees who are age 50 or over) to regular and/or Roth accounts. For 2024, the annual contribution limit has increased to $23,000 ($30,500 for employees who are age 50 or over). In addition, all eligible employees may participate in an employer-sponsored Roth plan, regardless of their income-level.

Unlike contribution to regular qualified retirement plan, which are made with pre-tax dollars, contributions to employer-sponsored Roth accounts are made on an after-tax basis, making them similar to Roth IRA accounts. Because taxes are paid upfront on employee contributions to Roth accounts, employees lose the current tax benefit of regular qualified retirement plans. However, when withdrawals are made from Roth accounts, qualified distributions are generally tax-free.

In contrast, distributions from regular retirement plans are taxed at ordinary income tax rates. The top tax rate on ordinary income in 2023 and 2024 is 37% — but it could revert to 39.6% after the favorable provisions of the Tax Cuts and Jobs Act expire, as scheduled, in 2026.

How Do Employer-Sponsored Roth Accounts Differ from Roth IRAs?

A key advantage of employer-sponsored Roth accounts compared to Roth IRAs is higher contribution limits. Contributions to a Roth IRA established outside the workplace are limited to only $6,500 in 2023 ($7,500 for those age 50 or over). The limit increases to $7,000 in 2024 ($8,000 for those age 50 or over). In addition, the ability to contribute to a Roth IRA is phased out for high-income taxpayers; there’s no income-based phase-out threshold for participating an employer-sponsored Roth plan.

Previously, there was a major downside of employer-sponsored Roth accounts compared to Roth IRAs: Employees who didn’t roll over employer-sponsored Roth account funds into Roth IRAs were required to take required minimum distributions (RMDs) after they reached the RMD age.

How Have the Rules for Roth Accounts Changed?

SECURE 2.0, which passed in December 2022, eliminates this downside. Under SECURE 2.0, starting in 2024, participants in employer-sponsored Roth plans aren’t required to take annual RMDs. This effectively levels the playing field between employer-sponsored Roth accounts and Roth IRAs when it comes to RMDs.

In addition, SECURE 2.0 allows an employer to give employees the option to decide whether to put fully vested company matching contributions into the company’s regular or Roth plan. Employees must pay taxes upfront on matching contributions made to employer-sponsored Roth accounts. Under prior law, employer contributions were required to go into employees’ regular retirement plan accounts, and later withdrawals from that account were taxable.

In addition, SECURE 2.0 allows SEP IRAs and SIMPLE IRAs to be designated as Roth accounts. This provision, which went into in effect in 2023, expands the pool of employees who can participate in employer-sponsored Roth accounts going forward.

Important: SECURE 2.0 originally required highly compensated employees’ catchup contributions to employer sponsored plans to be subject to Roth tax treatment, starting in 2024. However, this provision has been temporarily delayed until 2026.

Should You Contribute to Your Employer’s Roth Plan?

One of the major considerations in whether a Roth retirement plan is right for you is what you project your tax rate to be in retirement. Many think that rates are only going higher in the future but what you expect for taxable income in retirement will determine your tax rate. Depending on your retirement strategies, it could be more advantageous to take advantage of the pre-tax benefit of contributing to a regular retirement account now and get the deduction in your highest earning years.

These are just a few of the changes to retirement savings plans under SECURE 2.0. Contact our Private Client Services to discuss your retirement planning needs, including whether it makes sense for you to contribute to an employer-sponsored Roth account.