Gen Y = Gen Roth 401(k)

As Roth 401(k) plans continue to spread, young workers increasingly are voting to go Roth. In the first quarter of 2013, 10% of all participants in Wells Fargo-administered defined contribution plans contributed to a Roth 401(k), when available, up from 8.9% a year earlier. Leading the way were employees under age 30: 16.9% chose the Roth route, a jump from 15.2% participation in last year’s first quarter. (Only 4% of participants in their 60s chose the Roth version this year.)

“The continued upswing of Roth usage is driven by younger investors,” Laurie Nordquist, director of Wells Fargo Retirement, said in a statement. “This suggests that they are aware that their tax rates will likely go up as they age. Therefore it is a good strategy to opt for the lower tax bracket now, versus waiting to be taxed at their unknown rates in their 60s.”

This is particularly interesting news for financial advisors with young, not-so-wealthy-yet clients, especially those who stand to inherit from high-net-worth parents. Using a Roth plan wouldn’t cost them much in income tax today – because they aren’t earning much – but has huge potential benefits as they age and vault into much higher tax brackets due to wealth transfer events. Younger investors also have time on their side: with 40 years until retirement, assets have plenty of time to grow and are distributed, tax-free, after age 59 1/2 (provided the account is at least five years old.)

The findings were based on an analysis of two million eligible participants in a subset of retirement plans that Wells Fargo administers.

 

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