Offering retirement benefits is no longer optional for growing businesses. However, when choosing between Roth and traditional 401(k) plans, the tax implications alone can cause confusion. That’s where PrestigePEO steps in to make it simple, strategic, and valuable for you and your employees.
A Roth 401(k) lets employees contribute after-tax income now in exchange for tax-free withdrawals in retirement. Offering this option could strengthen your benefits package and improve employee retention.
Here’s what we’ll cover:
- Retirement plans are a key benefit SMBs can offer to attract and retain talent
- Employer-sponsored options include traditional and Roth 401(k) plans
- Roth 401(k) plans allow employees to pay taxes now rather than later
- Adding a Roth 401(k) helps meet the diverse financial needs of your workforce
- Prestige PEO helps administer retirement benefits to remove burden
What Is a Roth 401(k)?
A Roth 401(k) is an employer-sponsored retirement plan that differs from traditional 401(k)s in one significant way: when taxes are paid. While they may look similar, there are important distinctions.
Both plans allow employer matching and have identical contribution limits. The main difference is in tax treatment:
Traditional 401(k)
- Contributions are “pre-tax”
- Employees get a tax deduction on the amount invested every year
- The money is taxed when funds are withdrawn in retirement
- Required minimum distributions (RMD) start at age 73
Roth 401(K)
- Employees contribute after-tax dollars and receive no immediate tax deduction.
- Earnings grow tax-free, and qualified withdrawals made after age 59 and a half, provided the account has been open at least five years, are also tax-free.
- Starting in 2024, Roth 401(k) owners no longer have to take required minimum distributions during their lifetime, but if someone inherits the account, they must follow the standard RMD rules.
Contribution Limits and Eligibility
The Internal Revenue Service (IRS) sets annual contribution limits: workers under 50 can invest up to $23,000 a year. Workers 50 and older get catch-up contributions of $7,500 a year. Employers may match employee contributions in both plans.
All eligible employees can choose between a traditional 401(k) plan and a Roth 401(k) plan. They can also contribute to both plans. This added flexibility is a key factor in incorporating Roth 401(k) plans into your retirement benefits strategy, making it a straightforward and manageable process.
Tax Implications and Withdrawal Rules
As mentioned, the account must be open for at least five years, and the employee must be over 59 and a half for funds to be withdrawn tax-free. There are exceptions to this rule in the event of disability or death.
A Roth 401(k) is often a wise choice for employees who anticipate being in a higher tax bracket during retirement. Younger professionals and mid-career employees who are still years away from retirement may prefer this option because it has the potential to save a significant amount.
How Roth 401(k) Work for Employees
Employees can elect to have after-tax contributions automatically withdrawn from each paycheck. They will not enjoy a tax break immediately, as they would with a traditional 401(k). However, they will not have to pay taxes in retirement on qualified withdrawals.
Benefits for employees
- Tax-free retirement income
- Helps employees diversify retirement savings
- Employees benefit from compound interest and tax-free growth
- Smart option for younger professionals and those expecting higher tax brackets
Why Should SMBs Consider Providing a Roth 401(k)?
For SMBs that want to compete with larger companies, retirement options represent a way to stand out. There are also other financial advantages for business owners.
1. Improves recruitment and employee satisfaction
Nearly 93% of employees report that retirement benefits are one of the key factors in deciding whether to accept a job. In other words, today’s employees expect more than just a paycheck. An employer-sponsored Roth plan lets top talent know you care about their long-term financial goals.
2. Adds flexibility
Every employee has unique financial goals and needs. Some may prefer to enjoy tax-free contributions now, while others may want to defer taxes to a later date. By offering both traditional 401(k) and Roth 401(k) plans, you can cater to everyone’s needs without adding to your administrative workload.
3. Potential Savings
Including both plans does not necessarily mean additional expenses for employers. This is because both plans have the same IRS limits and administrative structure, making it a cost-effective solution for your business.
Is a Roth 401(k) Right for Your Business?
When considering whether to offer a Roth 401(k), it’s essential to consider a few key points. You want to ensure that plan options reflect your company’s goals and values, as well as the financial goals of your workforce.
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Consider these questions to ask:
- Are your employees interested in long-term tax strategies?
- Do you employ younger or mid-career employees?
- Do you want to expand your retirement plans to attract and retain talent?
If you answered yes to any of these questions, consider adding a Roth 401(k). It could be a smart move that won’t add complexity or administrative burden to your business or HR team, giving you peace of mind and confidence in your decision.
How PrestigePEO Simplifies Retirement Benefits
Adding retirement benefits might seem like an overwhelming burden for SMBs without a large internal HR team, but it doesn’t have to be. A professional employer organization, such as PrestigePEO, can help implement and manage retirement plans, including traditional and Roth 401(k) options.
Our experienced team offers comprehensive retirement benefits services:
- Support employee education
- Cost/benefit comparisons
- Assist with enrollment
- Oversee payroll matters
- Deliver required notices
- Ensure compliance with federal/state regulations
- Annual compliance audits
- Handle government filings
- Investment advisory assistance
- No document or audit fees
Whether you’re offering a retirement plan for the first time or expanding your existing benefits, we can help make the process more transparent and more efficient. Our integrated HR, payroll, and benefits solutions ensure your team receives the support they need at every step.
Retirement Plans Don’t Have to Be Complicated
Introducing a Roth 401(k) is more than a checkbox; it’s a strategic way to support your employees’ financial futures while strengthening your company’s benefits profile. And with the right support, it’s easier than you think.
With PrestigePEO as your partner, adding a Roth 401(k) for SMBs is easier than ever. Contact a PrestigePEO advisor today to learn more about adding or expanding your benefits package.
