Good afternoon,

Can someone please explain to me the benefits of a ROTH401(k) vs. the traditional 401(k) plan. I am currently enrolled in a traditional 401(K) plan, and considering the thought of moving that money into the ROTH401(k). Please advise;)

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Originally Posted by bmcglothan

Good afternoon,

Can someone please explain to me the benefits of a ROTH401(k) vs. the traditional 401(k) plan. I am currently enrolled in a traditional 401(K) plan, and considering the thought of moving that money into the ROTH401(k). Please advise;)

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The main difference between the two is when the money going into the account is taxed. A traditional 401(k) is tax-deferred meaning that you don't pay taxes right away. However, when you withdraw the money you will pay taxes on the money as usual.

A Roth401(k) has your money taxed immediately based on your current tax bracket. However, when you withdraw the money you can do so tax free.

Generally, if you are currently in a high tax bracket you are better off with the traditional 401(k) since you will save yourself a lot in taxes now and your future tax rate will likely be lower. If you are in a lower tax bracket now but expect to be in a higher one in the future, the Roth is the way to go because you will be paying a lower tax bill now than you would in the future.

Also, many financial experts believe tax rates in the future will be higher than today to pay for Social Security and Medicare. If that is the case, a Roth will look even better.