“My company just started offering a Roth 401(k). What should I do?” This is a question I receive at least monthly from clients.
Since their invention in 2006, Roth 401(k)s have become more prevalent in employer plans. Having the flexibility to decide whether to contribute to a traditional, pre-tax 401(k) plan or the after-tax option available with a Roth is a benefit to be carefully considered.
It used to be easier. The assumption was that most people would be in a lower tax bracket once they entered retirement, making the traditional, pre-tax option the obvious choice. But as we see in our practice, that is often not the case. If your employer has added a Roth option to your 401(k) plan, do some research and talk to your advisor and accountant.
Here’s what you should know about Roth 401(k)s:
This means that a 45-year-old could choose to allocate $10,000 to a Roth 401(k) and $9,000 to a traditional 401(k).
The big question then, is how to decide if or how you should allocate your contributions. This is where it gets a bit trickier as it really depends on your particular situation and how you can make the most of each type of plan. Since there isn’t a one-size-fits-all solution, we would be happy to walk through the pros and cons with you and help you make an evaluation.