Roth vs. Traditional 401(k): Which One Is Right For You?

Roth vs. Traditional 401(k): Which One Is Right For You?

December 21, 2022

Roth vs. Traditional 401(k): Which One Is Right For You?

When choosing your 401(k) plan, you have a couple options. Yet, you might wonder, "how do I know which one is right for me?" In this blog post, we go through the differences between a Roth 401(k) and a traditional 401(k) and how to determine which one is right for you.

What's the difference between each account?

A Roth 401(k) features tax-free growth and tax-free distributions. There are no deductions on contributions that you make on your current income. However, the limits on the Roth 401(k) are higher than the Roth IRA, and there are no income limits in terms of how much you make preventing you from making Roth IRA contributions. The traditional 401k is pre-tax contributions, tax-deferred growth, and tax when you take distributions in retirement.

Do I have to choose just one type of account?

 This isn't an all-or-nothing decision. You could decide to make all traditional 401k contributions or all Roth 401k contributions, or you could combine the two strategies and change your mind down the road if your tax situation changes.

What are the primary considerations to make?

 The primary consideration is you want to pay taxes when your tax rates are the lowest, so you need to understand your current tax rates and what you expect them to be in the future. Of course, nobody has a crystal ball, but you need to make base assumptions to figure out which one is right for you.

Generally, if your tax rates are lower today than they will be in the future, you might want to consider making Roth contributions, especially if you're younger. On the other hand, if you're in a high tax bracket today and will likely be in a lower tax bracket in retirement, you're gonna want to consider making pre-tax contributions.

Again, consult your tax professional and financial advisor on which decision makes the most sense for you.

Fiduciary Financial Partners can help your business with its retirement plans. For more information, contact us here. 

Interested in more retirement education? Check out our YouTube series Retirement Education with Nick Economos.