When saving money through your job’s retirement plan, you often get to choose between Roth 401(k) vs. traditional 401(k) contributions. So, which is best?

The choice comes down to when you want to pay taxes and other factors.

– With Roth 401(k) contributions, you pay tax on all of your income today, but you ideally get tax-free income in retirement. For that to work, you need to satisfy specific IRS rules.
– With traditional pre-tax 401(k), you reduce your income by the amount you contribute to the plan. That helps you save on taxes this year, and it might make it easier to save money in your plan.

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Note that this applies to other types of plans as well. For example, if you have Roth 403(b), 457, or TSP—or even Roth Solo 401(k)—things are similar. Check with your plan administrator and tax expert just to be sure.

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One way of making the decision is looking at tax brackets. When will you be in a lower tax bracket? You might want to pay taxes at the lowest rate possible. Other factors include how your retirement income is going to look. Having too much income could cause you to pay more tax on Social Security benefits or pay higher Medicare premiums. Or, if you retire early and get health coverage through a Marketplace or Exchange, a high income may prevent you from getting tax subsidies that help you save money.

Ultimately, you need to consider the big picture as well as this year’s tax impact. That takes some time and effort, but this is an important decision for your future.

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CHAPTERS:
00:00 Traditional 401(k) vs. Roth 401(k)
01:38 Basics and Why It Matters
03:47 Roth 401(k) vs. IRA
05:06 Similarities Between Roth and Traditional 401(k)
06:16 Example: Taxes, Contributions, and Withdrawals
10:15 How Contributions Work for Pre-Tax or Roth 401(k)
11:52 How Distributions Work for Roth or Pre-Tax 401(k)
16:14 Can You Spend All of Your Money?
17:49 Pros and Cons of Roth 401(k) vs. Traditional
19:34 Which Is Best? Which Should You Choose?
21:25 When Traditional 401(k) Makes Sense

IMPORTANT:
It’s impossible to cover everything you need to know in a video like this. The only thing that’s certain is that you need more information than this. Always consult with a CPA before making decisions or filing a tax return. This is general information and entertainment, and is not created with any knowledge of your circumstances. As a result, you need to speak with your own tax, legal, and financial professional who is familiar with your details. This video is not a substitute for individualized, personal advice. Please verify with your plan administrator when employer plans are involved. This information may have errors or omissions, may be outdated, or may not be applicable to your situation. Investments are not bank guaranteed and may lose money. Opinions expressed are as of the date of the recording and are subject to change. “Likes” should not be considered a positive reflection of the investment advisory services offered by Approach Financial, Inc. The Comments section contains opinions that are not the opinions of Approach Financial, Inc., and you should view all comments with skepticism. Approach Financial, Inc. is registered as an investment adviser in the state of Colorado and is licensed to do business in any state where registered or otherwise exempt from registration….(read more)

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Roth 401k vs Traditional 401k: Which Is Best for You?

When it comes to planning for retirement, one important decision you need to make is whether to contribute to a Roth 401k or a Traditional 401k. Both of these retirement savings plans come with their own set of advantages and considerations. Understanding the differences between the two will help you make the best choice for your financial goals.

A Traditional 401k is the most common type of retirement savings plan offered by employers. Contributions to a Traditional 401k are made on a pre-tax basis, meaning that the money you contribute is deducted from your taxable income for the year. This provides an immediate tax benefit as you lower your current tax liability. The contributions grow tax-deferred until you withdraw them during retirement, at which point they are subject to regular income taxes.

On the other hand, a Roth 401k works differently. With a Roth 401k, contributions are made after-tax. This means that the money you contribute to a Roth 401k will not lower your taxable income for the current year, but the big advantage is that your contributions and any potential earnings grow tax-free. When you reach retirement, you can withdraw your money without paying any taxes on it since you already paid taxes on your contributions.

So, which plan is best for you?

If you’re currently in a high-income tax bracket and expect to be in a lower tax bracket in retirement, a Traditional 401k might be more beneficial. By contributing pre-tax money, you reduce your taxable income and lower your tax liability during your working years when you’re likely to be in a higher tax bracket. However, keep in mind that when you withdraw the money during retirement, you’ll have to pay taxes on it, which could affect your overall retirement income.

On the other hand, if you’re in a lower tax bracket now but anticipate moving to a higher tax bracket in the future, a Roth 401k could make more sense. By paying taxes upfront, you can lock in your current tax rate and enjoy tax-free withdrawals in retirement when you’re likely to be in a higher tax bracket.

Another important consideration is your employer’s matching contributions. Employer contributions are typically made on a pre-tax basis, meaning they go into a Traditional 401k. If you choose the Roth 401k, your employer’s contributions will be deposited into a separate account called a Traditional matching account, which will be subject to taxes when withdrawn. It’s worth reviewing your employer’s matching contributions and considering how it might affect your overall tax strategy.

Ultimately, the best choice depends on your unique financial situation and retirement goals. Some individuals may choose to split their contributions between both plans to diversify their tax strategy. Others may prefer one plan over the other based on their current tax bracket, projected income, and investment preferences.

It’s essential to consult with a financial advisor or tax professional who can help you evaluate your personal circumstances and guide you towards the most suitable retirement savings plan for you. By making an informed decision about Roth 401k vs Traditional 401k, you’ll be well on your way to securing a financially stable retirement.