Pre-tax 401(k) vs Roth 401(k)
If your company offers both, you may have the choice between a Traditional pre-tax 401(k) and the newer Roth after-tax 401(k).
You can choose either plan to contribute a portion of your current wages. Both typically provide attractive tax savings that help your account grow over time.Pre-Tax 401(k)
When you participate in a pre-tax 401(k) account, you receive an immediate tax savings; your contributions are deducted from your pay before federal income taxes and income taxes of most states. That lowers the amount of your salary subject to taxation. You do not pay taxes on your deferrals and earnings until you withdraw them from your account.Roth after-tax 401(k)
Contributions to the Roth 401(k), on the other hand, are taken out after taxes. While there is no initial tax savings, you may benefit later on when you withdraw your funds. (Note: Qualified Roth 401(k) withdrawals are exempt from federal taxes. In order to qualify, the account must have been held for at least five years and the employee must be at least age 59½ when the withdrawals begin. Some state taxes may apply to Roth 401(k) withdrawals.)How to Choose
Determining which to select for your contributions depends in part on what you think your tax rate may be at retirement.
If you think it will be higher than now, you may want to accept less take-home pay for the future tax-free benefits of a Roth after-tax 401(k). If you expect your rate to be lower, you may instead choose to stay with the pre-tax 401(k).
You may also choose to make contributions to a combination of both accounts. Also, please note that if you're eligible for employer contributions, these will still be made with pre-tax dollars and therefore will be placed in a traditional pre-tax 401(k) account and taxed as ordinary income upon withdrawal.
Need help? Sign on to your retirement account and try the Roth 401(k) Analyzer. This tool will analyze the tradeoffs of contributing to a Roth after-tax 401(k) versus a pre-tax 401(k).