Roth 401k vs 401k – How to Choose

Roth 401k vs 401k: Which is Best for You?

When you’re faced with whether you are better off contributing to Roth 401k vs 401k, it comes down to a few differences that can make a big difference in your retirement.

The Basics

Traditional 401(k) and Roth 401(k) are options for workplace retirement savings, and employers are allowed to contribute to both.

Traditional 401(k)

• Contributions are pre-tax, so it reduces your current adjusted gross income.
• What you take out in retirement is taxed as ordinary income.
• To avoid penalties, you must not make withdrawals before age 59-1/2, with some exceptions.
• Not including any employer contributions, you can contribute up to $19,000 a year if you are younger than 50 and up to $25,000 at age 50 and older.

Roth 401(k)

• Contributions are after taxes and current adjusted gross income is not affected.
• What you take out in retirement is not taxed because you’re paying taxes up front.
• You can contribute up to $19,000 a year if you are younger than 50 and up to $25,000 at age 50 and older.
• You can take money out of the account after it has been kept for at least five years, on or after the age 59-1/2 or due to disability or death.
• You must begin taking distributions at 70-1/2.
• You can roll distributions over into a Roth IRA.

Which Should You Choose?

Are you better off being taxed up front, or waiting to have taxes taken out at retirement?

Consider a traditional 401(k) if:

• You expect your income to be lower in retirement. A lower income in retirement can reduce taxes on your Social Security benefits and Medicare premiums.
• For better after-tax benefits, you can invest any tax savings you receive from each year’s contribution to match what you could accumulate.

Consider a Roth 401(k) if:

• You expect your income to be higher in retirement.
• You want to be able to benefit from the total in your account, without having it reduced with taxes.
• You aren’t able to or don’t want to invest your tax savings each year.

Alternatives

You can choose to fund BOTH a traditional and a Roth 401(k) in order to change-up your tax situation in retirement.

You might also consider buying life insurance that builds value. EINSURANCE.com can explain more about the benefits of each type of life insurance and offers an online tool so you can compare insurance company quotes.