It doesn't take a financially savvy person to know that taking advantage of an employer 401k plan is a must for building a future retirement portfolio. However, some would say it difficult to choose between Roth 401k plan and atraditional 401k plan.
In general, both accounts are similar to each other in behavior:
- They both have participant contribution caps issued by the IRS annually
- They both are a way to plan for retirement
- Borrowing against the assets and accessing the assets have about the same stipulations
The main and most important difference is that by choosing a Roth 401k, you are contributing to the plan after taxes, and upon accessing the money at the legal time limit, no more taxes will need to be paid on the distributions.
Traditionally, 401k earnings contributed are made pre-tax, meaning the money is deducted directly from your paycheck and put aside into your retirement account. This deferral of your money can lower your tax bracket for the participating year, however taxes will need to be paid upon withdrawal of the funds - which may be a disadvantage since the more income you gain over your life time the higher your tax bracket is and in the end you may have to pay more tax on your savings.
If you are a worker facing the decision of which 401k path to follow - some factors to consider are: what stage of life and earning potential are you in? What you really need to gauge to formulate your choice is the expectation of your future tax rate. As mentioned earlier, if you are fairly new in the career game and expect your earnings and tax bracket to increase over time, it may more fitting for you to opt into a Roth 401k so you are not levied with a higher tax penalty in the future.However, if you are at your peak earning potential and actually expect your tax bracket to be lower in the future for whatever reason, you may opt into a traditional 401k to keep more of your money in your pocket.
Like any investment strategy, it is up to you to weigh the pros and cons and crunch the numbers. If you are not sure what is your best strategy, contact your tax preparer for some professional advice and counseling.
Learn more information about retirement plans how you can go about saving for retirement on Go Banking Rates.
