Roth 401(k)s Just Got Better. Here’s Why

Roth 401(k)s Just Got Better. Here’s Why

by | Accounting News, News, Newsletter, Retirement, Retirement Savings

If you’ve been sleeping on the Roth 401(k), it’s time for a second look. Yes, they used to come with that inconvenient drawback known as the Required Minimum Distribution (RMD), where you had to withdraw money on a set schedule, whether you needed it or not. But with the implementation of the SECURE 2.0 Act, RMDs are no longer required. Add to this a new rule for catch-up contributions, and Roth 401(k)s just became much more attractive, especially for high earners.

No RMDs Means More Control

Before this change, the IRS required you to start withdrawing money from your Roth 401(k) once you hit a certain age, which forced retirees to pull funds out of an account that would otherwise keep growing tax-free.

Now that both Roth IRAs and Roth 401(k)s are free from RMDs, they’re on a level playing field. This gives you control. If you want to leave your money in the account and let it grow, you can. You have the freedom and flexibility to time withdrawals based on your needs, not a government schedule.

Key Differences Between Roth 401(k) and Roth IRA

Both accounts offer tax-free growth and tax-free withdrawals in retirement. But they are not identical, and the differences are important.

With a Roth IRA, you can only contribute up to $7,500 annually in 2026 (or $8,600 if you’re 50 or older). There’s also an income limit. For 2026, the limit is $153,000 for single filers and $242,000 for joint filers. If you earn too much, you’re not eligible to contribute at all.

A Roth 401(k) doesn’t have those restrictions. The contribution limit is $24,500 in 2026, and there is no income limit.

So for higher earners, the Roth 401(k) is the more accessible option.

A New Rule for Catch-Up Contributions

As of January 1 of this year, under the SECURE 2.0 Act, catch-up contributions for employees who are 50 or older and earn over $150,000 must go into a Roth 401(k). You can no longer direct those extra contributions into a traditional 401(k). That means paying taxes now on those catch-up contributions instead of later.

This might feel constricting for some people, but it’s not a bad deal in the long run. Yes, you’ll pay taxes on contributions now, but the growth and withdrawals remain tax-free.

Why This Matters for High Earners

Put it all together and the Roth 401(k) starts to look like the better option for high earners. You can contribute more than a Roth IRA allows, and you won’t be excluded due to income limits. Your money grows tax-free, and when you withdraw it, you don’t owe taxes on the gains. This can be significant if your balance grows over decades.

Then there’s the question of future tax rates. Many people assume they’ll be in a lower tax bracket in retirement, but when you factor in required withdrawals, Social Security income, and other assets, this isn’t always the case. Some retirees may even end up in higher tax brackets. A Roth 401(k) helps avoid that risk.

To recap, no RMDs, higher contribution limits, and no income restrictions make Roth 401(k)s a strong option. And now, if you’re a high earner making catch-up contributions, you’ll be in a Roth account whether you planned for it or not. Hopefully, now you can start to see why that’s actually a good thing.

What Small Business Owners Need to Know About Their Retirement Planning Options

What Small Business Owners Need to Know About Their Retirement Planning Options

by | Accounting News, News, Newsletter, Retirement, Retirement Savings, Small Business

When it comes to reinvesting in their businesses, small business owners are pros. Buying equipment, hiring employees, and upgrading systems tend to come naturally. But setting money aside for retirement? That often gets put in the “later” category.

Here’s the problem with that approach: there’s no HR team enrolling you in a plan, and there’s no employer match unless you create one yourself. You need to be intentional about building a retirement plan. Here are some strategies to help you build retirement savings while reducing your tax burden.

Start with a 401(k)

A traditional 401(k) is a good starting point because it allows you to contribute a portion of your income before taxes, which lowers your current taxable income. And what makes it particularly enticing for small business owners is the ability to contribute as both the employee and employer. That means higher total contributions compared to other retirement accounts. These plans come with rules, nondiscrimination testing, and reporting requirements, so the setup is a little more complex, but the savings potential makes it worth your time and attention.

Consider a Roth 401(k) for Future Flexibility

A Roth 401(k) works differently than a traditional 401(k). You pay taxes on contributions now, but withdrawals later are tax-free. This can be useful if you expect to earn more in the future, or if you expect taxes to increase.

Many business owners contribute to both a traditional and Roth 401(k) so they’re not relying on one tax outcome.

SEP-IRA Offers Simplicity

The SEP-IRA is simple to open, easy to maintain, and has no annual filing requirements. Business owners can contribute up to 25% of your net income each year, and contributions can be made up until your tax filing deadline. This is helpful if your income varies.

If you have employees, you’ll have to contribute the same percentage for them as you do yourself, so keep this in mind as your team grows. But for solo entrepreneurs and smaller operations, this is a solid choice.

Solo 401(k): Flexibility for Owner-Only Businesses

If you don’t have employees (other than a spouse), the Solo 401(k) is worth looking into. Like a traditional 401(k), you can contribute as both employee and employer. That often allows you to save more compared to a SEP-IRA at similar income levels.

Many plans also offer Roth IRA contributions and loans against the account if you ever need extra funds, offering both flexibility and control.

Think About Combining Strategies

In most cases, using more than one strategy makes the most sense for small business owners, particularly if you have multiple income streams. For example, you might contribute to a 401(k) through your main business and use another plan for side income.

Making multiple strategies work together comes down to knowing how the plans fit together and staying within contribution limits. The rules can get complicated, so working with a professional can help you navigate the best setup, avoid mistakes, and modify your plan as your business grows or your income changes.