Here’s an interesting article talking about the pros and cons of a Roth 401(k) from Walter Updegrave of Money Magazine. Some of the highlights:
Let’s start with one basic but often misunderstood fact. Although they’re effectively mirror images of each other -with a regular 401(k) you invest pre-tax dollars and pay taxes at withdrawal, while with a Roth 401(k) you invest after-tax dollars and pay no tax at the end -in a pure economic sense there’s really no difference between the two….
Tax rates also play a role in the deciding between a regular 401(k) and a Roth 401(k).For example, if you happened to drop from the 25 percent to the 15 percent bracket by the time you withdraw the money from your regular 401(k), then you would deduct less in taxes, leaving you with more than in the Roth. Conversely, if you climbed into a higher tax bracket – say, 33 percent – then you would owe more in taxes on your regular 401(k), leaving you with less than in the Roth.
So what’s all this mean for someone like yourself trying to decide between a regular 401(k) and a Roth 401(k)?
Well, generally the Roth 401(k) is a better deal if you think you’ll end up in the same tax bracket or a higher one in retirement, and the regular 401(k) if you think you’ll end up in a lower bracket.
Share Your Thoughts: