A step by step checklist to help you decide whether to contribute to a Roth or traditional 401(k)
Start with your current income tax rate:
If you are in a higher tax bracket now than you expect to be in retirement, contribute to a traditional 401(k).
If you are in a lower tax bracket now than you expect to be in retirement, contribute to a Roth 401(k).
Next, consider your future income tax rate:
If you expect your tax rate to be higher in retirement than it is now, contribute to a Roth 401(k).
If you expect your tax rate to be lower in retirement than it is now, contribute to a traditional 401(k).
Think about your investment goals and priorities:
If you prioritize tax diversification and flexibility in retirement, consider contributing to both a Roth and traditional 401(k) if possible.
If you prioritize maximizing your tax savings today, consider contributing to a traditional 401(k).
If you prioritize maximizing your tax savings in retirement, consider contributing to a Roth 401(k).
Finally, consider your individual financial situation and goals:
If you are a prodigious saver and can contribute the maximum amount to a retirement plan, even if you don't get a tax break, a Roth account may be preferable.
If you are in your peak earning years and expect your income to be lower in retirement, a traditional contribution may make more sense.
If you are struggling to save and need to minimize the impact on your take-home pay, a traditional pretax approach may enable you to get your employer’s full 401(k) match with less impact on your take-home pay.
Remember, the decision of whether to contribute to a Roth or traditional 401(k) is a personal one that should take into account your individual financial situation and goals. Consult a financial advisor or tax professional to determine the best strategy for you.
Disclaimer. This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations.