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Your Personal Finance Questions - Answered!

“Is a Roth 401k Better Than a Traditional 401k?”

Today’s question comes from a young saver whose employer has just added a Roth 401k option, and are wondering where their priorities should be for saving and investing for retirement.

Today’s question is:

“Is a Roth 401k better than a traditional 401k?”

 

Transcript - Roth 401k vs Traditional IRA - What’s better?

Technically, a Roth 401k option makes more since if you believe you are at a lower tax rate today than you will be in the future.

One of the basic considerations is your future income. If you are in a position where you can expect a very high income later in your career, say a doctor, company executive, lawyer, etc. Then contributing to a Roth 401k before your earnings peak could be a very smart move.

Although it is not a universal recommendation, future income considerations aside, we find ourselves telling clients to allocate to their Roth 401ks more and more today for a couple reasons:

First, tax rates are near historic lows. The tax cut that was passed in 2018 lowered the tax rate for many Americans, and the individual tax rates are set to automatically increase in 2026. That means many workers are at lower tax rates today than they will be in a few years even if their income stays the same. We prefer the ability to lock in at today’s low tax rates if able.

Second, even if you don’t expect your income to dramatically increase. Between social security and your traditional 401k and IRA required minimum distributions (RMDs), you may be surprised at how high your future tax rate will be. Although many say they will be at a lower tax rate in retirement, for those with sizeable social security and IRA and 401k account balances, that rarely proves to be true.


 Roth accounts give you the flexibility to take the distributions as you need in retirement, without having to worry about tax implications.

 

Like anything, a little diversification goes a long way. For most, your company match into your 401k goes into a pre-tax retirement account, meaning that your Roth contributions and your traditional employer match leaves you will a balance in both accounts, and a lot of flexibility for whatever the future tax laws bring.


What’s best for you? Let us help you decide!


Matt Hylland