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Great talent is hard to find. It can be even harder to retain your best employees, particularly when the job market heats up. One proven technique to encourage employee longevity is to educate employees about financial planning tools that have their future in mind. This may involve many investment vehicles, but let’s focus on the Roth 401(k).
2010 was considered by many to be the Year of the Roth Conversion, due to substantial beneficial tax rule changes. Lost in all the noise about Roth conversions was the increasing popularity of Roth 401(k)s. These accounts are similar to traditional 401(k)s in that the money grows tax-deferred once inside the accounts.
The crucial differences are:
1. Employees do not receive an income-tax reduction in the year in which they contribute.
2. The money is income tax-free at withdrawal, provided certain important requirements are met.
3. There is no forced age at which distributions must be taken.
4. Any employer match still goes into a pretax account.
Why is offering a Roth 401(k) important? The nation’s workforce seems to be getting younger. Across all sectors, companies have been laying employees off. The majority of those laid off are older, higher-paid employees. Meanwhile, younger, lesser-paid employees are retained. Given their lower tax bracket, it may be wise for them to forgo a tax-deduction now in favor of receiving potentially tax-free income in retirement, when they may be in a higher tax bracket.
If your business doesn’t yet offer a Roth 401(k) option, consider it as you evaluate your benefits packages. Many companies are adding this feature. Remember that while your employees’ contributions go in after-tax, you can further sweeten the incentive (and increase employee loyalty) through a pretax employer match.
Coastal Capital Group
(Corrects Ryan Smith’s title.)
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