Roth 401k Plan

What is a Roth 401k Plan?

It's basically a 401k plan, but you can contribute after-tax dollars instead of pre-tax dollars. In a traditional 401k plan, you contribute pre-tax dollars from your paycheck. This means you don't have to pay payroll or state/federal tax on those contributions.

So Why Would I Want to Contribute After-Tax Instead?

* If you feel you will be in a higher tax bracket when you take your withdrawals, then a Roth 401k may be the better choice.

* If you want to make tax-free withdrawals at retirement, then the Roth 401k may be better.

* If you want to invest more per year to your 401k plan. Since the cap for 2008 is $15.5k to either method, it would take about $20,000 pre-tax dollars to make a contribution of $15.5k after-tax dollars. Therefore, you can technically stash more money away in a Roth 401k plan per year since $15.5k pre-tax is less than $15.5k after-tax in buying power.

* Roth withdrawals don't have to count towards your annual income in your retirement years, therefore you have the opportunity to avoid some taxes that you would otherwise pay on social security benefits.

* If you think tax rates with be higher in the future than they are now, then a Roth 401k plan might be the better option.

Reasons to Possibly Avoid a Roth 401k Plan.

* If you really need the tax deduction for the current tax year, then a Roth 401k plan may not be as great of a choice.

* If you think your tax rate now will be much higher than at retirement, then a Roth 401k plan may not be the best choice.

* If your company only offers a standard 401k plan then you are out of luck. Not all companies offer this choice yet, it is still fairly new.

Possibly Doing Both is the Best Way to Go?

Tax diversification may be the best route to go, because you can't know all of your circumstances or the tax laws for the future.

You may need or want to favor one 401k over the other according to your circumstances. If you're just beginning out in your life and likely to move into a higher tax bracket in the future, then you may want to do more in the Roth 401k plan.

If you think it's more likely you'll be in a lower tax bracket in retirement than you do now - perhaps you're earning a ton right now and you expect you'll change into a lower tax rate in the end of your career and during retirement, then you may want to consider contributing more to a standard 401k. Also, your employers matching contribution will always go to the standard 401k account, not your Roth 401k plan.

Although what decision you make isn't the most critical choice you'll make in your retirement planning, it certainly is one that could have consequences down the road. It's always best to sit down with a financial expert or spend more time researching what options are available to you.