Investments: Episode 20
Increasingly employers are offering their employees the option of participating in a Roth 401(k) as an alternative to a traditional 401(k). In this episode I'll walk you through the differences between the two options and we'll go to the math to see which is a better choice for you.
Here is the Roth vs Traditional spreadsheet I used during the episode.
The basic difference between the two vehicles is when you pay taxes.
- In a traditional 401(k) your contributions go in pre-tax and grow tax deferred while they are in your account. However, you pay taxes on the money when you take it out.
- With a Roth 401(k) your contributions are made with after-tax dollars. But, once the money is in your 401(k) you never pay taxes on it again, even when you take it out in retirement.
- What this amounts to is an "eat your cake now or later" type of decision for you. In the simple example I used for this episode you would sacrifice 8% annual spending in your pre-retirement years for over 50% more spending in retirement.
There is no right or wrong decision. What is more important to you? Current spending while you are young or a more secure and potentially vibrant retirement?
Are you participating in Roth 401(k)? Does your employer offer one?