The “set it and forget it” aspect of saving money in a 401(k) plan can work a great deal to your advantage. Money that never hits your wallet won’t get wasted on something you’ll buy and never remember.

Except never stepping back and reviewing what you’re doing could mean that you’re overlooking some options you might not even know exist. Ever think of putting money in a Roth 401(k) at work? Do you know if your employer offers one as part of your retirement savings plan?

More employers than you might imagine currently offer a Roth 401(k) option, and if you’re wondering how it’s different from a traditional 401(k), well, saving now in the Roth option could mean a lot more dollars in your pocket when you are retired.

Essentially, it boils down to when you want to pay taxes. Typically, withdrawals from a Roth 401(k) are tax-free in retirement, if various rules are met. The Roth 401(k) account, for example, must be established for at least five years, and generally, you’d need to be over the age of 59½ for tax-free and penalty-free withdrawals.

As you’re working, though, you don’t get an upfront tax break on contributions made in to a Roth 401(k) each year, as you would with a traditional 401(k). The traditional 401(k) has tax-deductible contributions but you’re stuck with taxable withdrawals.

This year, the Roth 401(k) option became more attractive by eliminating one meddlesome feature and offering greater flexibility in retirement. Thanks to changes in the Secure 2.0 Act, required minimum distributions are no longer required for Roth 401(k)s beginning in 2024. If you don’t need the money, you won’t be required to withdraw it in your 70s and you’d be able to let it keep growing tax-free.

What do millennials know that the rest of us don’t?

About 93.5% of Fidelity-managed 401(k) plans at the end of the first quarter of 2024 offered a Roth option, according to Michael Shamrell, Fidelity’s vice president of thought leadership for workplace investing.

“It’s really seen some healthy growth over the last few years,” Shamrell said. Go back five years, Shamrell said, and only 68.9% of Fidelity 401(k) plans were offering a Roth option in the first quarter of 2019.

Many employees, though, are ignoring the Roth or don’t realize that a Roth 401(k) exists. Only about 15.2% of plan participants are contributing to a Roth in those Fidelity 401(k) plans, Shamrell said.

Those who have chosen the Roth 401(k) option span all ages and incomes, according to Fidelity data, but Fidelity says the Roth 401(k) is most utilized among 401(k) savers who are 25 to 29 years old.

“Millennials, that is where we’re definitely seeing the most uptick,” Shamrell said. About 17.5% of millennials are contributing some or all of their retirement savings into a Roth 401(k) — the highest among all the generations.

For Gen Z, those born between 1997 and 2012, the Roth 401(k) contribution rate was 16.8%. By contrast, only 11.5% of baby boomers are making contributions into a Roth 401(k).

GM, state of Michigan among first employers to offer Roth

The Roth 401(k) isn’t new. It could first be offered by employers back in 2006. In general, the Roth 401(k) got off to a very slow start with many companies waiting years before offering that option to employees.

General Motors was one of the few companies to offer a Roth 401(k) option to its employees early in the game. And the state of Michigan began offering a Roth 401(k) in 2007 for state employees.

Currently, 15.3% of state employee participants in the defined contribution plan utilize the Roth 401(k), according to Laura Wotruba, director of communications for the Michigan Department of Technology, Management & Budget.

A Roth savings option in the 457(b) plan, Wotruba said, will be available to Michigan public school participants in August 2025. A 457(b) is a tax-advantaged, employer-sponsored retirement plan offered to some government employees, and employees of certain tax-exempt organizations.

Stellantis, which is the parent of such brands as Ram Truck and Jeep, added the Roth 401(k) to the mix in January 2012. At Stellantis, fewer than one in five 401(k) participants — or 17.5% — contribute to or have money in the Roth 401(k) option, according to data provided by company spokeswoman Jodi Tinson.

Ford began offering the Roth 401(k) to U.S. hourly and salaried employees in 2013, but declined to give details on how many employees participate.

Pontiac-based United Wholesale Mortgage also offers a Roth as a part of its 401(k) package but declined to provide a percentage of team members who participate.

401(k) savings: Don’t ‘set it and forget it’

“The bigger the company, the more likely they are to have a Roth 401(k) option,” said Sam G. Huszczo, a chartered financial analyst in Southfield. Some smaller 401(k) plans don’t offer the Roth option as a way to cut costs.

A common thread that he’s seen with savers who don’t seek investment or tax advice is that they just use the traditional pre-tax 401(k) as “the default option.”

“Set it, forget it, then wake up at age 55 and question whether in hindsight it was the right move,” Huszczo said.

Another financial adviser said he believes that the Roth 401(k) is overlooked by too many people. And he’s baffled by why more people aren’t using the Roth 401(k).

“To me, it’s the biggest financial paradigm shift that hasn’t happened yet.”

Many times, he’ll talk with clients who don’t even realize the Roth is offered in their 401(k).

The carrot of the traditional 401(k) was the pre-tax deduction just to encourage people to start saving in their 401(k) plans back in the 1980s and 1990s.

“Fast forward from the ’80s, ’90s to today,” he said. Many assumed decades ago, he said, that many people wouldn’t be able to save much for their retirement.

Or, he said, the assumption was that “everybody would fail at replacing their pension. And it assumed people would not accumulate a million or 2 million or 3 million dollars.” But that’s not always the case now.

The Roth 401(k) can help people build up savings, he said, that won’t be taxed in retirement.

He said he thinks that federal income taxes have nowhere to go but up, and he says if you’re saving money aggressively and consistently for retirement, you’re not necessarily going to be in a lower tax bracket at retirement.

“Now we have something that’s infinitely better than pre-tax savings,” he said, “and the country is doing what it always did. It’s like we’re still using rotary phones, even though we have cell phones. There’s better technology out there and we’re still doing the same thing.”

Maximum contributions

Individuals can contribute up to $23,000 total into their traditional or Roth 401(k) plans in 2024, no matter how high their income is that year. The catch-up contribution limit for employees aged 50 and over who participate in these plans is an additional $7,500 in 2024.

Many like upfront tax breaks but need to think long term

Back in 2006, I talked to retirement savings and IRA expert Ed Slott about the introduction of the Roth 401(k), which he said then was “the greatest account ever created for people.” And he’s not changed his mind in 18 years.

Today, Slott has written a new book called “The Retirement Savings Time Bomb Ticks Louder,” where he hammers home the tax impact on retirement nest eggs once you start withdrawing money in retirement. Retirement plans, he writes, are the most valuable asset many people own, often worth more than even their homes.

Across the country, 401(k) plans — which were added into the tax code in 1978 — held $7.4 trillion in assets as of Dec. 31, 2023, according to the Investment Company Institute.

The sales pitch of the 401(k) plan is simple: People who work for an employer who has set up a 401(k) can easily put aside a percentage their paychecks. The contribution is tax-deferred, which means someone who is in the 22% marginal tax bracket can contribute $100 while sacrificing $78 in take-home pay.

The sales pitch of a Roth 401(k) is more complex: People who work for an employer who also offer a Roth 401(k) can still put aside a percentage their paychecks. But the contribution into a Roth 401(k) isn’t tax-deferred. What’s the benefit then? The money withdrawn in retirement would be tax free. Still, someone who is in the 22% marginal tax bracket can contribute $100 and see their take-home pay reduced by $100.

Many times, Slott told me, retirement savers put too much emphasis on saving money upfront in taxes by making a traditional 401(k) contribution. They like the idea of being able to reduce their taxable income each year.

If you make $50,000 a year on the job and set aside 10% of pre-tax pay into a traditional 401(k), you’d reduce your taxable income that year by $5,000. If you’re in a 12% marginal tax bracket, you’re saving $600 in taxes.

“They call it a deduction. But it’s really not a deduction,” Slott told me in phone interview in July.

“It’s only a deferral of taxes.”

Retirement, Slott said, means long-term planning. So, you really shouldn’t focus mainly on a short-term tax break.

“Begin with the end in mind,” Slott said. “If you think of it that way, why would anybody take a tax deduction now that has to be paid back later?”

Roth 401(k) can offer some tax diversification

The theory for many is that their incomes in retirement will be far lower than they are when they’re working, meaning that theoretically they could be in a lower marginal tax bracket in retirement than they were when they were working. And that may be true for some people, particularly those who are paid well over their careers but aren’t saving a lot.

Christine Benz, director of personal finance and retirement planning for Chicago-based Morningstar, said she can understand why many people simply stick with the traditional 401(k), calling it a “painless way to start seeing your balance grow very quickly.”

“There is an element of immediate gratification to making those pre-tax, traditional contributions,” Benz said.

But there’s a downside: Withdrawals out of a traditional, pre-tax 401(k) would be fully taxable in retirement.

Many times, too, she said, a 401(k) plan that has automatic enrollment — where the employer automatically deducts part of your pay to save into the retirement plan — will default into a traditional plan, not a Roth 401(k) plan. That’s true unless the employee takes action to put that money into a Roth 401(k).

Under the Secure 2.0 Act, employers are allowed to put matching contributions into a Roth 401(k). But if you select to have the match put into a Roth 401(k), you’d face a higher tax bill. You’d be obligated to pay taxes on your company’s Roth contributions each year that you’d receive that money into the plan.

Benz expects that many employers will stick with what is simplest and continue to only offer matching contributions on a pre-tax basis.

Yet, Benz said, retirement savers need to diversify their exposure to taxes in retirement, much like they diversify their investments in retirement savings plans.

Saving money in a Roth 401(k) offers tax diversification by allowing you to withdraw as much money as you want each year during your retirement years without paying taxes.

You need to do your homework

A traditional 401(k) continues to have rules relating to required minimum distributions.

Many retirees in their 70s must withdraw at least some money from other types of retirement savings to address complex required minimum distribution rules each year. The minimum amount required reflects one’s age and retirement savings.

The Secure 2.0 Act, passed by Congress in late 2022, raised the age for required minimum distributions in general to 73 for those who turned 72 in 2023 and later.

If you reach age 73 in 2024, the Internal Revenue Service notes, you can delay taking your first required distribution for this year until April 1, 2025, but those who delay still must take another required minimum distribution for 2025 by Dec. 31, 2025. In other words, those savers who delay would face two required minimum distributions in 2025.

Large withdrawals in a year from a traditional pre-tax 401(k) will trigger taxes and possibly send you into a higher marginal tax rate. That’s not true with a Roth 401(k).

If one year, you wanted to take money out of a Roth 401(k) to buy a dream retirement home, you could do that and not worry about getting bumped into a higher marginal tax bracket.

When it comes to retirement savings in a 401(k) plan, it’s not an all or nothing decision. Employees can contribute some money to a Roth 401(k) and some to a traditional 401(k) out of the same paycheck.

Benz said it’s good to explore how such a Roth 401(k) plan could work in your situation.

When is the tax break more valuable to you? Will it be more valuable now? Or will it be more valuable when you’re retired?

“It really does come down to a calculated guess on your tax bracket when you make the contribution versus when you’re withdrawing the funds in retirement,” said Benz , whose new book “How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement” will be released in September.

Right now, she said, conversations about the Roth 401(k) highlight the historically, relatively low marginal tax rates now. “The wager is that we will see higher tax rates in the future,” Benz said. So the Roth 401(k) could look more attractive in general.

For many younger workers, she said, the Roth 401(k) could be a good option, especially if their career path leads to a higher salary and higher tax rates in the future. Some younger workers could be seeing the lowest tax rates in their lives now.

Many people, she said, should try to get some tax advice on which type of contribution would be better for them individually. For some people, she said, splitting the difference — saving some money in a Roth 401(k) and saving some in traditional 401(k) — might be a good answer.

“Maybe do some of both, which plans will typically allow,” Benz said. She’s made contributions into a Roth 401(k) for more than a decade now, but part of the reasoning was that her husband’s plan had not offered a Roth for many years.

“I just love the idea of having tax-free funds in retirement,” she said. “I think it will give us some flexibility.”