{"id":3519,"date":"2013-01-17T12:20:48","date_gmt":"2013-01-17T20:20:48","guid":{"rendered":"http:\/\/canary.kcprod.info/blog\/?p=3519"},"modified":"2022-01-11T17:12:44","modified_gmt":"2022-01-12T01:12:44","slug":"roth-401k-vs-traditional-401k","status":"publish","type":"post","link":"https:\/\/canary.kcprod.info/blog\/roth-401k-vs-traditional-401k\/","title":{"rendered":"When A Roth 401(k) Trumps A Traditional 401(k)"},"content":{"rendered":"

The New Year\u2019s Day tax deal (also known as the fiscal cliff legislation) made headlines in the retirement world because it included new rules<\/a> to make it easier for employees to convert existing traditional 401(k) plans to Roth 401(k) plans. Over the past six years, an increasing number of companies have begun to roll out Roth 401(k) options for their employees.<\/p>\n

Many people now have the simple question: \u201cWhen does it make sense to choose a Roth 401(k)?\u201d<\/strong><\/p>\n

Before we answer that question, you should understand the key difference between a Roth 401(k) and a traditional 401(k). With a Roth, you\u2019ll pay taxes on the money you invest now, but no taxes when you withdraw the money at retirement.<\/p>\n

In other words, contributions to a Roth 401(k) are not tax deductible, unlike contributions to a traditional 401(k). Distributions from a Roth 401(k) are not taxable, unlike the distributions from a traditional 401(k). The combined contribution limit is $17,500.<\/p>\n

A Roth 401(k) enables you to pay a small tax bill upfront in exchange for what is almost undoubtedly a larger tax bill later. Thus, most discussion of Roth accounts tends to devolve into a debate on how much higher (or lower) tax rates will be in the future.<\/p>\n

However, for most people, the issue is more basic. If you are a disciplined saver, you can get the same effect and<\/em> the current tax deduction. You can save in a regular 401(k) now, take the deduction, and then save an additional sum in a taxable account to pay your tax bill on retirement.<\/p>\n

So the question boils down to: Do you have the self-control and spending discipline to save money now to pay off taxes later?<\/strong> Or do you need the crutch of the Roth account?<\/p>\n

Like everything tax related, specific situations and details matter. So let\u2019s walk through the factors that can help you decide whether a Roth 401(k) will make sense in your situation. By the way, in general, you should only maximize your retirement savings after you have enough liquidity or have built up your emergency fund<\/a>.<\/p>\n

Why not just choose a Roth IRA?<\/h2>\n