The right type of retirement account depends on where you are in your career today, not just where you hope to be tomorrow. Here's how to guide employees toward the option that best fits their life.
Choosing between a Roth and a Traditional retirement account, whether a 401(k) or an IRA, often comes down to one central question: is your tax rate higher now, or will it be higher in retirement? The answer to that question may depend upon where you stand in your career. Younger, lower-earning employees typically benefit from the tax-free growth that Roth accounts provide, while higher-earning professionals in their peak earning years often find more value in the upfront tax deductions that Traditional accounts offer. Understanding these distinctions is the foundation of smarter retirement planning.
No single account type is best for everyone. The most effective approach recognizes that the right account may change as income grows, tax brackets change, and retirement draws closer. Here is how the right account may change across four key stages of a working life.
Lower income typically means a lower tax bracket. Paying taxes now at that lower rate to secure tax-free withdrawals later is usually the right move. Roth IRAs also offer a useful flexibility bonus: contributions (not earnings) can be withdrawn penalty-free at any age, making them a forgiving choice for employees who are still building their financial footing.
Peak earning years push employees into higher tax brackets. This is where Traditional accounts earn their value by providing meaningful tax deductions lowering taxable income right now. Many advisors recommend a 50/50 split or a simple formula, such as contributing a percentage equal to age plus 20, toward Traditional accounts to maintain healthy tax diversification across both account types.
Contributions to Traditional accounts reduce income tax during the highest-earning years. Employees over 50 can also take advantage of catch-up contributions, an extra $8,000 in 2026. One important note: the SECURE 2.0 Act now requires that catch-up contributions made by high earners be directed to Roth accounts, a shift worth communicating clearly to this group. Read more about Roth Catch Up Contributions here.
As of 2024, Roth 401(k)s no longer require Required Minimum Distributions (RMDs), allowing tax-free growth to continue indefinitely. Traditional accounts, by contrast, trigger mandatory RMDs at age 73, which can push retirees into higher tax brackets at exactly the moment they least want additional taxable income.
When employees are weighing their options, a side-by-side comparison of how these accounts differ in structure and tax treatment can make the choice much clearer. Roth accounts are funded with after-tax dollars, meaning withdrawals in retirement are tax-free and are not subject to RMDs. Traditional accounts offer a current tax deduction, but withdrawals are taxed, and participants must take RMDs after turning 73.
Whether an employee contributes to a Roth account or a Traditional account, employer match contributions are made into the Traditional 401(k) account. Withdrawals based on employer contributions are taxed even if the employee contributes to a Roth account. Roth accounts work best for employees in the lower tax bracket today, who expect to be in a higher tax bracket later. Traditional accounts tend to favor those in a higher bracket now, who expect lower income in retirement.
When employees come to HR or benefits teams unsure of which type of account to choose, these four principles can move the conversation forward.
When an employee cannot predict future tax brackets, a Roth account is often the best choice. If an employee is not sure whether future tax rates will be higher or lower, defaulting to a Roth account may be the better choice. Paying taxes now at a known rate eliminates the uncertainty of what tax law might look like decades from now.
High-income earners have a backdoor option. Employees whose income disqualifies them from contributing directly to a Roth IRA should know that a "Backdoor Roth" conversion is a legal and widely used strategy. Educating this group about the option and connecting them to a financial advisor can make a meaningful difference in their long-term planning.
Tax diversification is almost always a smart strategy. Contributing to both Roth and Traditional accounts give employees flexibility in retirement to draw from different buckets and actively manage their taxable income year by year. This adaptability can be especially valuable as tax laws evolve and personal financial circumstances change.
Helping employees make the right retirement account decisions starts with having the right plan in place. RMC Group works with employers to design retirement plans that offer flexibility, ensure compliance, and support employees at every stage of their career. Ready to get started? Schedule a meeting with RMC Group's retirement team today to find the plan that works best for your organization and your people or contact our office at 239-298-8210.