The number of employers offering a Roth savings option to 401(k) investors continues to grow, allowing more employees to access the unique financial benefits.

About 88% of 401(k) plans allowed employees to save in a Roth account in 2021, compared to 86% in 2020 and 49% in 2011, according to the Plan Sponsor Council of America. The trade group surveyed more than 550 employers of various sizes.

A Roth is a kind of after-tax account. Employees pay taxes upfront on 401(k) contributions, but investment growth and account withdrawals at retirement are tax-free. This differs from traditional pre-tax savings, where employees get a tax break up front but pay later.

Employee acceptance of Roth has also grown. According to the PSCA, nearly 28% of employees enrolled in a 401(k) plan paid Roth contributions in 2021, up from 18% in 2016. By comparison, 80% of participants paid traditional pre-tax contributions. (Employees can choose to use either or both.)

“It’s been steadily increasing,” Hattie Greenan, the group’s research director, previously said of Roth’s growth.

Awareness of the benefits of Roth accounts has grown over time among employers and employees, potentially pressuring companies to add the option, Greenan said.

Education efforts by employers about Roth tax breaks are also likely to have helped, especially at smaller businesses, where the share of 401(k) participants saving in a Roth account has increased from 42% in 2020 to 51% in 2021, she said.

Public awareness of Roth savings may have grown further last year as Democratic lawmakers weighed in on rules to curb the use of such accounts as tax shelters for the wealthy. A ProPublica article outlined how billionaires like PayPal co-founder Peter Thiel Roth used accounts to amass massive wealth.

In the end, those Roth restrictions on the wealthy — initially part of the Build Back Better Act, a multibillion-dollar package of social and tax reform — didn’t make it into Democrats’ final legislation, the Inflation Reduction Act, which President Biden signed into law in August. .

Congress is considering amendments to the Roth rules as part of the retirement legislation known as Secure 2.0. A measure would require catch-up contributions (for people aged 50 or older) if Roth. Another provision would let participants choose a Roth option for employer contributions.

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But despite the growing focus on the Roth 401(k), there are many reasons why the overall share of 401(k) investors making Roth contributions remains relatively low.

Automatically enrolling employees in 401(k) plans has become popular – 59% of plans used so-called “auto-enrollment” by 2021. Often, companies don’t set Roth savings as the default savings option, meaning auto-enrolled employees proactively change their allocation.

Further, employers who match 401(k) savings do so in the pre-tax savings bin. Higher earners may also mistakenly believe there are income limits for contributing to a Roth 401(k), as there are with a Roth individual retirement account.

Roth 401(k) contributions make sense to investors who are likely to be in a lower tax bracket now than when they retire, financial advisors said.

That’s because they would collect a bigger nest egg by paying taxes now at a lower tax rate.

It’s impossible to know what your tax rates or exact financial situation will be when you retire, which may be decades in the future. “You’re basically just making a tax bet,” Ted Jenkin, a certified financial planner and CEO of oXYGen Financial, recently told CNBC.

However, there are some guiding principles for Roth.

For example, Roth accounts will generally make sense for young people, especially those just entering the job market, who are likely to have their highest earning years ahead of them. Those contributions and any investment growth would then compound tax-free for decades. (An important note: Investment growth is tax-free only for withdrawals after age 59½, and provided you’ve had the Roth account for at least five years.)

Some may eschew Roth savings because they assume that both their expenses and their tax bracket will fall when they retire. But that doesn’t always happen, according to financial advisors.

In addition to tax savings, there are also benefits to Roth accounts.

For example, savers who roll their Roth 401(k) money into a Roth IRA do not have to make any required minimum distributions. The same is not true for traditional pre-tax accounts; retirees must withdraw money from their pre-tax accounts starting at age 72, even if they don’t need the money. (Depositors with a Roth 401(k) should also take RMDs.)

Roth savings can also help lower annual Medicare Part B premiums, which are based on taxable income. Because Roth withdrawals are considered tax-free income, strategically withdrawing money from Roth accounts can prevent someone’s income from exceeding certain Medicare thresholds.

Some advisors recommend allocating 401(k) savings to both pre-tax and Roth, regardless of age, as a hedge and diversification strategy.