Personal Finance

The Roth 401(k) is becoming more common

Published

1 day ago

December 26, 2024

Business Finance News

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Retirement savers, take note: more employers have added a Roth savings option to their workplace 401(k) plans.

And, due to a legislative change, it’s likely the remaining holdouts will soon offer it, too.

About 93% of 401(k) plans offered a Roth account in 2023, according to an annual poll published in December by the Plan Sponsor Council of America, an employer trade group.

That’s up from 89% in 2022 and 62% a decade ago, according to the survey, which polled more than 700 employers with 401(k) plans of varying size.

How Roth, pretax 401(k) savings differ

Roth refers to how retirement savings are taxed.

A Roth is an after-tax account: Savers pay tax upfront on their 401(k) contributions but, with some exceptions, don’t pay later when they withdraw money.

Roth conversions on the rise: Here's what to know

By contrast, pretax savings have been the traditional route for 401(k) plans. Savers get an upfront tax break, deferring their tax bill on investment earnings and contributions until later, when they make withdrawals.

It seems like many aren’t taking advantage of Roth availability: About 21% of eligible workers made a Roth contribution in 2023, versus 74% who made a pretax contribution, according to PSCA data.

How to choose between Roth or pretax contributions

Choosing which kind of 401(k) contributions to make — pretax or Roth — largely comes down to your current tax bracket and expectations about your future tax rate, according to financial advisors.

You want to choose the one that will keep your tax bill lowest. In short, it’s a tax bet.

This requires some educated guesswork. For example, many financial advisors recommend Roth accounts for those who are early in their careers, a point at which their tax rate is likely to be lower than in the future, when their salary will almost certainly be higher.

“We always recommend [Roth] for someone who’s in a low salary, typically the younger working folks,” said Olga Ismail, head of retirement plans consulting at Provenance Wealth Advisors.

“It’s the lowest tax bracket you’re ever going to be in, so why not take advantage of it now if you can?” she said.

A Roth 401(k) also provides a unique savings opportunity. Roth individual retirement accounts — Roth IRAs, for short — have a lower annual contribution limit than 401(k)s and have income caps on eligibility. A 401(k) has no income caps. So, a Roth 401(k) lets higher earners access a Roth account directly, and allows all savers to contribute more money to a Roth account than they could otherwise.

Financial planners also generally recommend diversifying among pretax and Roth savings. This grants tax flexibility in retirement.

For example, strategically withdrawing money from a Roth account for income may keep some retirees from triggering higher premiums for Medicare Part B and Medicare Part D. Those premiums may increase with income — but Roth withdrawals don’t count toward taxable income.

Also, while many people expect their tax rates to decline in retirement, this isn’t always the case.

Why Roth 401(k) adoption will increase

More savers will likely soon have a Roth 401(k) option available to them if they don’t already.

A 2022 retirement law known as Secure 2.0 will require “catch up” 401(k) contributions to be made to Roth accounts, if the worker’s income exceeds $145,000 (indexed to inflation). That rule takes effect in 2026.

High earners age 50 or older would be required to contribute any additional savings over the annual 401(k) limit to a Roth account, meaning nearly all 401(k) plans would likely need to offer Roth accounts, Ismail said.

401(k) plans opening to more part-time workers

Workers can save up to $23,000 in a 401(k) for 2024. Those age 50 and older can save an extra $7,500 in catch-up contributions.

“Offering Roth as an option has become a best practice the last few years,” and due to the mandate for high earners, “we will continue to see Roth become commonplace,” said Hattie Greenan, PSCA’s research director.

Additionally, Secure 2.0 allows businesses to make an employer 401(k) contribution like a match as Roth savings. About 13% of employers said they would “definitely” add the option, and another 35% said they’re still considering it, according to PSCA data.

Personal Finance

If interest rates stay ‘higher for longer,’ the winners are those with cash accounts

Published

2 hours ago

December 27, 2024

Business Finance News

Images By Tang Ming Tung | Digitalvision | Getty Images

Many people, especially those with debt, will be discouraged by the recent Federal Reserve forecast of a slower pace of interest rate cuts than previously forecast.

However, others with money in high-yield cash accounts will benefit from a “higher for longer” regime, experts say.

“If you’ve got your money in the right place, 2025 is going to be a good year for savers — much like 2024 was,” said Greg McBride, chief financial analyst at Bankrate.

Why higher for longer is the 2025 ‘mantra’

Returns on cash holdings are generally correlated with the Fed’s benchmark interest rate. If the Fed raises interest rates, then those for high-yield savings accounts, certificates of deposit, money market funds and other types of cash accounts generally rise, too.

The Fed increased its benchmark rate aggressively in 2022 and 2023 to rein in high inflation, ultimately bringing borrowing costs from rock-bottom rates to their highest level in more than 22 years.

Not sure the Fed will even get two rate cuts off in 2025, says Roger Ferguson

It started throttling them back in September. However, Fed officials projected this month that it would cut rates just twice in 2025 instead of the four it had expected three months earlier.

“Higher for longer is the mantra headed into 2025,” McBride said. “The big change since September is explained by notable upward revisions to the Fed’s own inflation projections for 2025.”

The good and bad news for consumers

The bad news for consumers is that higher interest rates increase the cost of borrowing, said Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.

“[But] higher interest rates can help individuals of all ages and stages build savings and prepare for any emergencies or opportunities that may arise — that’s the good news,” said Cheng, who is a member of CNBC’s Financial Advisor Council.

High-yield savings accounts that pay an interest rate between 4% and 5% are “still prevalent,” McBride said.

By comparison, top-yielding accounts paid about 0.5% in 2020 and 2021, he said.

The story is similar for money market funds, he explained.

Money market fund interest rates vary by fund and institution, but top-yielding funds are generally in the 4% to 5% range.

However, not all financial institutions pay these rates.

The most competitive returns for high-yield savings accounts are from online banks, not the traditional brick-and-mortar shop down the street, which might pay a 0.1% return, for example, McBride said.

Things to consider for cash

There are of course some considerations for investors to make.

People always question which is better, a high-yield savings account or a CD, Cheng said.

“It depends,” she said. “High-yield savings accounts will provide more liquidity and access, but the interest rate isn’t fixed or guaranteed. The interest rate will fluctuate, nor your principal. A CD will provide a fixed guaranteed interest rate, but you give up liquidity and access.”

Additionally, some institutions will have minimum deposit requirements to get a certain advertised yield, experts said.

Further, not all institutions offering a high-yield savings account are necessarily covered by Federal Deposit Insurance Corp. protections, said McBride. Deposits up to $250,000 are automatically protected at each FDIC-insured bank in the event of a failure.

“Make sure you’re sending your money directly to a federally insured bank,” McBride said. “I’d avoid fintech middlemen that rely on third-party partnerships with banks for FDIC insurance.”

A recent bankruptcy by one fintech company, Synapse, highlights that “unappreciated risk,” McBride said. Many Synapse customers have been unable to access most or all of their savings.

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Personal Finance

Credit card debt set to hit record levels as consumer holiday spending rises

Published

3 hours ago

December 27, 2024

Business Finance News

A woman shops at a Target store in Chicago on Nov. 26, 2024.

Kamil Krzaczynski | AFP | Getty Images

Heading into the holidays, many Americans were already saddled with record-breaking credit card debt. And yet, consumer spending is set to reach a fresh high this season.

The National Retail Federation reported last week that spending between Nov. 1 and Dec. 31 is “clearly on track” to reach a record, between $979.5 billion and $989 billion.

“Job and wage gains, modest inflation and a heathy balance sheet have led to solid holiday spending,” the NRF’s chief economist, Jack Kleinhenz, said in a statement.

But other reports show that many shoppers are increasingly leaning on credit cards to manage their holiday purchases.

To that point, 36% of consumers have taken on debt this season, a recent report by LendingTree found. And those who dipped into the red racked up an average of $1,181, up from $1,028 in 2023, according to the survey of more than 2,000 adults.

“No one should be surprised that so many Americans took on debt this holiday season. Prices are still really high and that means that lots of Americans simply didn’t have any choice,” said Matt Schulz, LendingTree’s chief credit analyst.

“Inflation is still a big deal in this country, and it’s having a huge impact on people’s finances, including their holiday spending,” he said.

Credit card debt is at an all-time high

Heading into the peak holiday shopping season, credit card balances were already 8.1% higher than a year ago, according to the Federal Reserve Bank of New York’s report on household debt.

Further, 28% of credit card users had not paid off the gifts they bought last year, according to another holiday spending report by NerdWallet, which polled more than 1,700 adults in September.

Fmr. Saks CEO Steve Sadove talks consumer spending trends over the holidays

In some cases, Americans’ willingness to spend is a sign of confidence, Schulz noted. “Some surely took on debt because they didn’t have any other choice, while others did so because they wanted to splurge a bit and weren’t concerned about paying a little extra interest in order to get what they or their loved one really wanted.”

However, credit cards continue to be one of the most expensive ways to borrow money. The average credit card rate is currently more than 20% — near an all-time high. Some retail card APRs are even higher.

The problem with credit cards

Of those with debt, 21% expect it’ll take five months or longer to pay it off, LendingTree also found. At that rate, sky-high interest charges will exact a heavy toll, according to Schulz.

“That means less money to put towards other big goals for the new year, such as growing an emergency fund or saving for college,” he said. “In more extreme cases, it may mean you’re less able to pay essential bills or keep food on the table. In either case, it’s a big deal.”

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Personal Finance

36% of American consumers took on holiday debt, averaging $1,181

Published

23 hours ago

December 26, 2024

Business Finance News

Manonallard | E+ | Getty Images

Many Americans are capping off the holidays with new debt balances.

This season, 36% of American consumers took on holiday debt, according to a new survey from LendingTree.

Those who racked up balances this season took on an average of $1,181 in debt, up from $1,028 in 2023. However, that is still down from $1,549 in 2022, LendingTree found.

Less than half — 44% — of the people who took on debt expected to acquire those balances, a sign that this holiday season is still financially challenging for many people, according to Matt Schulz, chief credit analyst at LendingTree.

Higher prices caused by inflation remain an issue for many individuals and families this holiday season, he said.

“Some of it is people just wanting to wrap up what’s been a difficult year by spreading a little joy, and maybe they ended up taking on a little bit of extra debt to do so,” Schulz said.

Those most likely to take on debt this season include parents of young children, with 48%; millennials ages 28 to 43, with 42%; and individuals who earn $30,000 to $49,999, with 39%, according to LendingTree.

Consumers who went into debt over the holidays run the risk of still carrying those balances when next year’s holiday season comes around. Almost half of Americans still have debt from last year’s holidays, WalletHub recently found.

Meanwhile, paying down debt is a top financial resolution for 2025, according to a recent Bankrate survey.

For those who want to get out of debt, it helps to get started as soon as possible, Schulz said.

Successfully knocking off those balances has its own reward in the way of freedom, said Laura Mattia, a certified financial planner and senior vice president at Wealth Enhancement Group in Sarasota, Florida, who works with clients at all levels of wealth.

“People love to be debt free,” Mattia said. “The idea of not owing anybody any money is extremely comforting.”

Negotiate your interest rates

For those who took on holiday debt, 42% said they are paying interest rates of 20% or higher, typically through credit cards or store cards, LendingTree found.

The good news is that it’s possible to get better interest rates — and therefore lower the total amount it takes to pay off your debt — by pursuing either a 0% balance transfer credit card or a debt consolidation loan.

“There’s really no better weapon against credit card debt than a 0% balance transfer credit card,” Schulz said.

Most offers provide either 12 or 15 months without accruing interest on the transferred balance, he said. However, a fee for transferring the balance may apply.

Gen X most likely to max out their credit cards, survey finds

Pick a debt paydown strategy you can stick with

Those people in debt may want to pick from different strategies to tackle their balances.

That includes the avalanche method — which prioritizes high interest rate debts first — or the snowball method – which puts the smallest balances first.

“What really matters more is finding the one that works best for you and that will keep you motivated,” Schulz said.

Mattia said she often advises clients to start with the smallest balances first, so they immediately feel their situation improving.

“What deters people the most is when they feel like they’re not making progress and they give up,” Mattia said.

Try to increase your savings

While paying down debt balances may be the primary goal, it also helps to set aside some cash for emergencies.

That way, when an unexpected expense comes up — or next holiday season rolls around — you may not have to lean quite so much on credit cards, Schulz said.

“One of the best ways to break out of the cycle of debt that so many people find themselves in is to save while you’re paying down your debts,” Schulz said.

Still, it’s important to keep in mind that the best interest rates available on savings are around 5%, while credit cards are charging north of 20% and prioritize accordingly, Mattia said.

Celebrate small wins

In the aftermath of the holidays, give yourself grace if you spent more than you intended, said CFP Jesse Sell, managing principal at Prevail Financial Partners in Stillwater, Minnesota.

“It’s not terribly uncommon to kind of let otherwise good discipline go for a few weeks over the holidays,” Sell said.

As you work to pay down your overall debt, it helps to break it down into smaller goals that you can celebrate along the way, he said.

Once you hit a smaller milestone, celebrate that victory with a small reward.

Admittedly, paying down debt is not really fun, Sell said.

“Try to find ways to take some positives out of it and keep the momentum and focus going,” Sell said.