RobertPowell

One in two employers now offer a Roth 401(k). But we’re a long way from one in two workers taking advantage of the chance to sock away after-tax money to their Roth 401(k), according to a new study.

Slightly less than 9% of workers who have an employer-sponsored Roth 401(k) plan at contributing money to that plan, according to a study published by the National Bureau of Economic Research, “Who Uses the Roth 401(k), and How Do They Use It?”

What’s more, Roth participation is more than twice as high among 401(k) participants who were hired after the Roth 401(k) was introduced in 2006 rather than among 401(k) participants who were hired before the Roth introduction, according to the authors of the study, John Beshears, James Choi, David Laibson and Brigitte Madrian.

By way of background, the Roth 401(k) is a retirement savings plan that represents a combination of features of the Roth IRA and a traditional 401(k) plan. This employer-sponsored investment savings account is funded with after-tax money, and after the investor reaches age 59½, withdrawals of any money from the account (including investment gains) are tax-free, according to Investopedia.

According to the study, Internal Revenue Service regulations stipulate that the combined before-tax plus Roth contributions in a calendar year cannot exceed a certain limit that is adjusted each year. For people younger than 50, this limit for 2013 is $17,500 in 2013; for workers 50 and older the limit is $23,000.

One reason why so few workers are contributing to Roth 401(k) has to do with the nature of humans, according to the study. “In essence, once an employee joins a 401(k) she becomes passive/inattentive, thereby reducing the likelihood of reacting to the introduction of a new Roth option,” the authors wrote. Read the paper.

So given that sort of inertia, and given the results of their study, we asked the authors how workers might approach the question of when and how to use a Roth 401(k). Here’s what they had to say.

Deciding whether to save in a Roth vs. a regular 401(k) savings account is not necessarily a straightforward decision because one type of account is not necessarily better than the other, said Madrian, a professor at Harvard Kennedy School.

“The primary difference between the two types of accounts is when you pay taxes,” she said. “With a Roth, you pay taxes on the income you save today but pay no taxes when you take money out of the account in retirement. With a regular 401(k), you pay no taxes on the income you save today and but you do pay taxes on the money you take out of the account in retirement.”

According to Madrian, the Roth is a more attractive savings vehicle if you think your tax rate is lower today than it will be when you retire. And the regular or traditional 401(k) is a more attractive savings vehicle if you think your tax rate is higher today than it will be in retirement, she said.

So what factors might sway you into preferring one vs. the other?

When to use a Roth 401(k)

“If you aren’t paying any federal income tax, you are not getting any tax benefit from saving in a regular 401(k),” said Madrian. “For you, a Roth 401(k) is a no-brainer.”

According to Madrian, employees who are likely to fall into this category: young employees who are just starting out and expect their income to grow over time, employees whose income is temporarily low perhaps due to an unemployment spell during the calendar year, and employees with a large number of exemptions and deductions that are unlikely to persist into retirement (for example, individuals with a lot of children, or a big mortgage).

When to use a traditional 401(k)

If, however, your tax rate is likely to fall in retirement, then a regular 401(k) makes more sense, Madrian said. “Saving in a regular 401(k) reduces your tax liability today when your tax rate is higher than it is likely to be in retirement,” she said. “This is more likely to be true for middle-income employees who expect Social Security to comprise a decent share their income in retirement.”

When to use both