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Roth 401(k) vs. Traditional 401(k)

Ask Savvy: Should I Choose a Roth 401(k) or a Traditional 401(k)?

My girlfriend, a 25 year-old Human Resources Associate, manages to pay her Manhattan rent and save for retirement. She just got a great new job and asked me what direction to take with her new 401(k). Her employer offers a traditional 401(k) plan and a Roth 401(k) option, and she's not sure which one would be best for her. To see my answer just

This is an age old question that goes back to oh, 2006 when Roth 401(k) accounts were first introduced. The first question to ask is if your employer has the same matching contribution policy for both types of accounts. If they offer matching contributions for both accounts then keep reading, otherwise just go with the one that gets you free money!

The main difference between a Roth 401(k) and a traditional 401(k) is that the Roth version is funded with after-tax wages while the traditional 401(k) is funded with pre-tax wages. That means if you choose the Roth 401(k) you don't have to pay taxes on money pulled out in retirement, so investment earnings grow tax-free. If you choose the traditional 401(k) you would pay ordinary income tax rates on distributions. Now, what should you take from all this tax talk?

Roth 401(k)s are good options for younger workers, like my girlfriend, who are currently taxed in a lower tax bracket but expect to be taxed in a higher bracket upon retirement. If you expect to be in a similar tax bracket in retirement you can still use the Roth 401(k) to hedge against possible future government tax hikes.

Ideally, you'll contribute as much as you can to your retirement savings. If paying taxes now like you would with a Roth 401(k) would cause you to make lower contributions than you normally would, then it may not be the option for you. However, if you can keep up with your contributions I think the Roth 401(k) would be the best option for now. You could try using the Forbes Roth 401(k) Analyzer to see which is in fact a better option for you.


Join The Conversation
freegracefrom freegracefrom 9 years
I wish my 401K was a Roth... heaven only knows what the tax rate will be years from now.
tee0206 tee0206 9 years
Definitely good to know.
gooniette gooniette 9 years
i'm lucky that my company offers both because i'm so indecisive. so, i'm contributing part to the roth 401K and the other part to a traditional. :-)
mlen mlen 9 years
i agree- i think the roth is the way to go as long as you can contribute the same amount you normally would in a regular- you don't want to skimp on your contributions but paying the taxes now will most likely beenfit you in the long run!
melizzle melizzle 9 years
I agree with princess. I'm in a Roth 401 at work and although paying taxes on it stinks, I know it will benefit me in the long run!
princessjaslew princessjaslew 9 years
can you ask your friend if she can recommend me for a job that pays that well??? seriously. i think if you can afford to pay your taxes now, do it now. who knows how high taxes will go in the future? besides, won't it be nice to know in your old age that the only bill you really have to worry about is medical and not the IRS?
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