One retirement savings vehicle doesn’t get the attention it deserves, according to one financial expert.
The Roth 401(k) is “the unsung hero, if you will, of your retirement plan,” Sun Group Wealth Partners Managing Director Winnie Sun recently told Yahoo Finance Live, especially for her clients whose "No. 1 goal" is to have tax-free savings in retirement.
A Roth 401(k) is an employee-sponsored retirement plan that allows you to contribute after-tax earnings versus pre-tax earnings in a traditional 401(k). About 70% of employers offer this option in their 401(k) plan, according to Sun.
Sun called the Roth 401(k) one of her “favorite avenues of saving for retirement” because of its ability to allow contributions to grow entirely tax-free and spared from capital gains taxes, as long as account holders are able to make it to 59 and a half without making a single withdrawal.
“One of the best things about the Roth 401(k) is it's kind of uncontroversial,” she said. “[It] doesn't matter how much you earn, even if you're at that high tier, you can contribute to that plan.”
That's a key difference from a Roth IRA, which comes with income limitations for contributing. But those who exceed those income thresholds can still do a backdoor Roth IRA, Sun said, where you convert a traditional IRA into a Roth IRA after paying taxes upfront. Traditional IRAs don't have income limitations.
That strategy can open up your investment options, Sun said.
“You can definitely do both your 401(k) at work, as well as your IRA,” she said. “You can pick certain investments that you're more passionate about to also piggyback on that Roth 401(k) at work.”
Sun advises her clients to have a “balanced approach” to investing. For investors who gravitate toward a more conservative financial approach, Sun encourages a higher degree of fixed income or even cash reserves, but warned of the risk of not being able to keep up with inflation returns.
“Personally, I like to see a good percentage of growth equity, so that way you have a potential for greater gain,” she said.