• Share:
• Tweet

More employers are offering the option of a Roth 401(k) in addition to the traditional 401(k). It’s great to have options, but  how do you know if you should go the route of the Roth or stick with the regular?

It’s important to first understand the difference between the two. With a regular 401(k), you’re investing pre-tax dollars. In other words, your contribution to your retirement fund is taken out of your paycheck before taxes are. And since Uncle Sam always gets his cut, that means that you have to pay taxes on those funds when you withdraw that money at retirement.

By contrast, with a Roth 401(k), taxes are taken out of your contribution up front, meaning you pay nothing to withdraw those funds at retirement.

You’ll also see a diff in your paycheck between the two options for the same amount of money. For instance, let’s say you make $40,000 a year and contribute $200 per paycheck to your retirement fund. If you opt for the Roth 401(k), your paycheck will be $200 less. If you choose the regular 401(k), your paycheck will be roughly $150 less.

So what will give you the most benefit at retirement? According to Money Magazine‘s pros and cons of Roth 401(k) vs. a regular 401(k), the most important consideration has to do with your tax bracket. Essentially, if you think you’ll be in the same or higher tax bracket when you retire, the Roth 401(k) is generally the better deal. If you think your tax bracket will be lower at retirement than it is now, then it may be best to go with the regular 401(k).

Okay, so how do you know what your tax bracket at retirement will be? It’s tough to make that guess, but many experts advise those who are younger and at the beginning of a career to go the way of the Roth. Chances are, if you’re just starting out, you’ll be in a better place financially at retirement than where you are now. If you’re not at the beginning of your career and you’re not sure what your tax bracket might be at retirement, Money recommends contributing to both a regular 401(k) and a Roth 401(k).

No matter what you choose, the most important thing is that you’re saving for your retirement now. Don’t put your future at risk by putting off saving.

Tags: 401k, cnn money, money magazine, personal finance, personal finance articles, personal finance blog, personal finance tips, pre-tax dollars, pros and cons of 401(k), pros and cons of roth 401(k), Quicken Loans, Quizzle, quizzle blog, quizzle.com, roth 401(k) or traditional 401(k), roth 401(k) vs. traditional 401(k), roth 401k, tax bracket, traditional 401k