Roth 401(k)s: If Your Employer Offers One, Should You Switch?
Making the most of your employee benefits is essential in this tough economy. With more employers than ever adding a new Roth 401(k) option to their retirement plan offerings, should you make the switch or stick with your existing retirement strategy?
A survey from Aon Hewitt found that employers plan to take advantage of a brand-new law allowing workers to make transfers from their existing regular 401(k) accounts to Roth 401(k)s. Although half of the major employers surveyed don't offer a Roth 401(k) option yet, nearly one third of them expect to add a Roth in the next 12 months.
When Would You Like to Pay Taxes?
For decades, regular 401(k)s have let you arrange to have money taken out of your paycheck on a pre-tax basis and put into a retirement account. By contrast, Roth 401(k)s give you the option of contributing after-tax money toward retirement.
Sponsored Links
Whenever you can use pre-tax money to invest, or to pay for any expenses, it's usually a smart idea. But with traditional 401(k)s, there's a tradeoff: You have to pay taxes on the money you withdraw when you retire.
With Roth 401(k)s, on the other hand, you put post-taxed money into the account, but any future distributions -- money you withdraw, hopefully, after earning a good return on your investment -- are tax-free. In essence, you're trading a current tax break for a future one when you choose a Roth over a traditional 401(k).
Which One Should You Pick?
If you have access to both, choosing between a Roth or a regular 401(k) requires guessing about your future tax rates.
If you pay taxes at a lower rate now than you expect to after you retire, then a Roth is smart.
If your income puts you in a higher tax bracket now than you're likely to be in during retirement, then the pre-tax traditional 401(k) is a better move.
Workers who are just starting out in their careers should strongly consider a Roth 401(k). With modest entry-level salaries, most new workers don't pay high taxes anyway, making the current tax break of a regular 401(k) worth little. In fact, with the new tax law allowing you to convert existing 401(k) balances to a Roth 401(k), workers in low tax brackets should take a close look at paying some extra tax now in order to avoid higher taxes down the road.
Contact your human resources department to find out if you have a Roth 401(k) available to you. If so, ask for information about your options for both future contributions and your existing retirement account balances. And if your employer doesn't offer a Roth 401(k), you might gently suggest the possibility of adding it to an existing plan.
More on Taxes at the DailyFinance Tax Center
E-Filing Tips: How to Get Your Federal Tax Refund Faster and Safer
Estate Tax Is Alive and Well, and States Are Dying for the Revenue
You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger.
