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

Many people are unaware that their 401(k) retirement plan may also offer an after-tax Roth option. This may seem like a great option, however there are always elements to consider before jumping on the Roth 401(k) bandwagon; you want to be sure that a Roth option is what makes sense based on your particular situation.

When looking between these options, the main factor to consider is tax rates. If you believe that your future tax rates will be higher than your current tax rate, a Roth 401(k) may be the best option for you. Roth could also be the better option if you are a younger employee in a low tax-bracket, aiming to have higher earnings later on.

Other factors useful to consider are age and overall tax diversification between tax, Roth and Traditional accounts. However if you’re looking for more cash flow in the near future, a Traditional 401(k) would be the best option for you.

The traditional 401(k) or Roth 401(k) battle all comes down to the question, how is your money going to work best for you. Below is a chart that breaks down the differences and helps you make the decision about how to make the most of your money.

 

401(k) Chart

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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