Many businesses now offer employees a Roth 401(k) in addition to the traditional one. Which is right for you?
With a traditional 401(k), your contributions are pre-tax, lowering your taxable income, and your earnings can grow tax-deferred. By contrast, you put after-tax dollars into a Roth 401(k), but your contributions and earnings can grow tax-free, provided you meet certain conditions.
If you think your tax rate will be lower when you retire, you might be more inclined to go with the traditional 401(k), which allows you to avoid paying taxes on your contributions now, when your tax rate is high.
Conversely, if you think your tax bracket may rise when you retire, you might want to consider the Roth 401(k) to avoid being taxed at the higher rate when you start taking withdrawals.
Some employers allow employees to split their contributions between the Roth and traditional 401(k) accounts. You may want to consult with your tax advisor before making any moves, but no matter which path you follow, try to take full advantage of your 401(k), because it’s a great way to save for retirement.