Perks of the Roth 401(k) for Millennials

Does your employer offer a “Roth” option for your 401(k) plan? If so, and you haven’t opted for this choice, I’d like to share some useful information that may change your mind!

What’s the main difference between the Roth vs. the Traditional 401(k)?

When you elect the Traditional option, your money goes in pre-tax (meaning you get a tax deduction the year the contribution is made). However, the kicker is you will pay ordinary income tax upon withdrawal from this account during retirement. Put more simply, it’s like you get a tax break for planting a single kernel of corn, but are fully taxed on the entire harvest.

The Roth option works in the exact opposite manner – the money you contribute goes in after tax (so no deduction is received today), but the money is received completely tax-free during retirement.

Some other cool facts about the Roth 401(k)

Ultimately, the better choice depends on whether you think you will be in a lower tax bracket today or in the future. If you feel like it’s today, then it makes sense to pay the taxes now and select the Roth option. However, even if you’re uncertain, there is still another important factor that makes the Roth beneficial. Few people know that even when you opt for the Roth option your employer’s matching contributions still go into the Traditional option. So, it’s like you get the best of both worlds because you get “eggs” in each basket! If taxes are higher in the future you can withdrawal from your own Roth contributions (received tax-free), or if taxes are lower you can withdrawal from your employer’s Traditional contributions (enjoy the benefits of paying lower taxes).

Think about it this way: if diversification is good for our investments, doesn’t it make sense that tax diversification is a good thing too? The Roth 401(k) provides this benefit, so think carefully about whether it’s the right option for you!

Terry Andersen