My girlfriend, a 25 year-old Human Resources Associate, manages to pay her Manhattan rent and save for retirement. She just got a great new job and asked me what direction to take with her new 401(k). Her employer offers a traditional 401(k) plan and a Roth 401(k) option, and she's not sure which one would be best for her. To see my answer just read more
This is an age old question that goes back to oh, 2006 when Roth 401(k) accounts were first introduced. The first question to ask is if your employer has the same matching contribution policy for both types of accounts. If they offer matching contributions for both accounts then keep reading, otherwise just go with the one that gets you free money!
The main difference between a Roth 401(k) and a traditional 401(k) is that the Roth version is funded with after-tax wages while the traditional 401(k) is funded with pre-tax wages. That means if you choose the Roth 401(k) you don't have to pay taxes on money pulled out in retirement, so investment earnings grow tax-free. If you choose the traditional 401(k) you would pay ordinary income tax rates on distributions. Now, what should you take from all this tax talk?
Roth 401(k)s are good options for younger workers, like my girlfriend, who are currently taxed in a lower tax bracket but expect to be taxed in a higher bracket upon retirement. If you expect to be in a similar tax bracket in retirement you can still use the Roth 401(k) to hedge against possible future government tax hikes.
Ideally, you'll contribute as much as you can to your retirement savings. If paying taxes now like you would with a Roth 401(k) would cause you to make lower contributions than you normally would, then it may not be the option for you. However, if you can keep up with your contributions I think the Roth 401(k) would be the best option for now. You could try using the Forbes Roth 401(k) Analyzer to see which is in fact a better option for you.