This Retirement Plan Feature Has Tax-Free Growth, but Only 18% of Investors Use It

When planning for retirement, choosing the right account can make a major difference in how much money you ultimately keep. Roth retirement accounts, including Roth IRAs and Roth 401(k)s, allow investors to grow savings tax-free and withdraw funds without paying income taxes in retirement. Despite the advantages, adoption remains surprisingly low. Understanding how these accounts work can help you determine if they belong in your retirement plan.

Here's a closer look at why Roth accounts matter and how to make them work for you.

Not many people use a Roth IRA

Although the Roth feature is increasingly available, relatively few investors take full advantage. By the end of 2024, 86% of Vanguard retirement plans offered a Roth option, up from 74% in 2020. Among larger plans, 95% offered the feature, yet just 18% of participants actually elected to use it.

This gap indicates that many savers may be missing out on tax-free growth opportunities that could significantly boost their retirement savings.

What is a Roth IRA?

A Roth IRA is a type of individual retirement account that allows you to contribute after-tax dollars. Unlike traditional IRAs, contributions are not tax-deductible, but qualified withdrawals in retirement are completely tax-free.

This makes it especially valuable for those who expect to be in a higher tax bracket later or want to reduce tax liability on future income. Funds in a Roth IRA grow over time, and you can continue contributing as long as you have earned income and don't earn above the income limit.

Benefits of a Roth IRA

Roth accounts offer several key advantages. Contributions grow tax-free, and qualified distributions — including both contributions and earnings — aren't taxed. This can help investors maximize their wealth over decades, particularly if markets perform well. 

At age 59 ½, you can make tax and penalty-free withdrawals from your Roth IRA, as long as the account has been open for at least five years, you're the original account owner, and it was not inherited. Withdrawals before age 59 ½ are subject to a 10% early withdrawal penalty, unless the funds are used for qualified education expenses, expenses for birth or adoption, certain medical expenses, or towards the purchase of your first home.

Additionally, Roth IRAs have no required minimum distributions (RMDs) during the original owner's lifetime, which provides more control over long-term investment growth, withdrawals, and estate planning.

Roth IRA contribution and income limits

There are IRS limits to how much you can contribute to a Roth IRA each year. In 2025, the maximum annual contribution limit is $7,000 for most individuals, or $8,000 for those aged 50 and older.

Income also affects eligibility; to contribute up to the IRS limit, single filers must not have a modified adjusted gross income (MAGI) greater than $150,000, and married couples filing jointly must not have a combined MAGI greater than $236,000. Beyond those thresholds, you'll face partial or complete restrictions on contributions. Understanding these limits ensures you remain compliant while still taking advantage of tax-free growth.

Roth IRA versus other types of retirement accounts

Compared with traditional IRAs and 401(k)s, Roth accounts offer a unique tax profile. Traditional accounts reduce taxable income upfront, but withdrawals in retirement are taxed as ordinary income. Roth accounts, in contrast, provide no immediate tax break but offer tax-free withdrawals, which can be especially advantageous if you expect higher taxes later.

Choosing between Roth and traditional options depends on your current tax bracket, anticipated future income, and retirement strategy.

How to choose the right retirement account for you

Deciding whether to use a Roth IRA or Roth 401(k) requires evaluating your current and projected tax situation. If you expect to be in a higher tax bracket later, Roth contributions may make more sense, allowing you to pay taxes at today's lower rate.

Also, consider diversification: using a mix of Roth and traditional accounts can provide flexibility in retirement, letting you manage taxable income more efficiently. Finally, compare employer matching options and account fees, as these factors can influence long-term growth.

Bottom line

Roth retirement accounts are a powerful way to build wealth while reducing taxes in retirement, yet only a small fraction of eligible investors currently use them. The accounts' tax-free growth, no RMDs, and flexibility make them an essential tool for retirement planning.

If you're not yet taking advantage of Roth contributions, reviewing your retirement plan and evaluating whether adding a Roth account fits your strategy can help you set yourself up for retirement with more confidence and potential savings.