The Roth version of the 401(k), introduced 10 years ago, has yet to go viral. More than six in 10 plans offer a Roth option but fewer than 20 percent or so of employees with the option of saving in a Roth 401(k) use it.

Those that do use the Roth tend to be younger workers. Contributions to a traditional 401(k) are made with pre-tax dollars, while the Roth 401(k) offers no upfront tax break. Thus, the conventional wisdom is that older workers in their prime earning years should focus on using the traditional 401(k) given the ability to reduce their current taxable income.

New academic research “turns conventional wisdom on its head” says study co-author David Brown, assistant finance professor at the University of Arizona. “Everyone, regardless of age or income can benefit from doing some saving in a Roth 401(k).” The research found that the value of having some retirement savings in the Roth has the impact of adding an annualized 1 percent to 2 percent to a retirement account’s value.  

A Taxing Question

In retirement you must make required minimum distributions (RMD) from a traditional 401(k) beginning in the year you turn 70.5, regardless of whether you need that money or not. Every penny of withdrawals from a traditional 401(k) are taxed at whatever your tax rate is in retirement. With a Roth 401(k), there is no tax on your withdrawal and you can sidestep the need to even take an RMD by rolling over your Roth 401(k) into a Roth IRA before you reach age 70.5. If you anticipate being able to leave assets to your heirs, using a Roth will retain more money for your beneficiaries.

If you were 100 percent convinced your tax rate in retirement will be the same, or lower, than your current income tax rate, sticking with a traditional 401(k) makes plenty of sense. But the reality is that we all live with plenty of “tax uncertainty” says Brown. For starters, it’s hard to know exactly what your income will be in retirement; so you may in fact not see any appreciable decline in your tax rate. An analysis of traditional vs. Roth IRAs last year by T. Rowe Price last year found that someone 50 years old would need to see a steep drop in their retirement tax rate of at least nine percentage points before the traditional becomes more advantageous.

Moreover, assuming our current income tax code will remain static is quite a big assumption. As Brown and co-authors Scott Cederburg of the University of Arizona and Michael S. O’Doherty of the University of Missouri point out, since the federal income tax was introduced in 1913, the rate for an individual with inflation-adjusted income of $100,000 has changed 39 times. Using a Roth 401(k) is effectively adding a hedge against any future changes that might negatively impact your retirement tax burden. (For the record, the three academics have opted to divide their retirement savings between both the traditional and Roth versions.)

More Retirement Flexibility

Beyond tax-rate arbitrage, having some money in a Roth will give you more control over your taxable income once you’re in retirement.

Withdrawals from a Roth 401(k) don’t impact your adjusted gross income. That can help you minimize the “Social Security tax torpedo,” says Kevin Brown, a benefits consultant at Willis Towers Watson, referring to the fact that up to 85 percent of Social Security benefits can be counted as taxable income if your total income is more than $25,000 ($32,000 for married couples.)

Having access to tax-free withdrawals can also come in handy when an unexpected expense crops up in retirement—be it a 75th birthday splurge trip or medical expenses not covered by Medicare. Taking an extra chunk out of a traditional 401(k) or IRA will boost your adjusted gross income for that year; potentially pushing you into a higher tax bracket. That won’t be in play if the money comes out of your Roth 401(k).

And if you retire before age 65, when Medicare kicks in-and you need to purchase health insurance through the ACA exchange, using your Roth for living expenses can reduce your insurance cost. “Roth withdrawals don’t count as taxable income, so your income may be low enough to qualify for subsidies,” says Wagner.