Taxes are a key consideration when deciding on a Roth 401 (k) instead of a traditional 401 (k). If you're young and currently in a low tax bracket but expect to be in a higher tax bracket when you retire, then a Roth 401 (k) might be a better deal than a traditional 401 (k). The main difference between a Roth 401 (k) and a 401 (k) is when you pay taxes into your employer-sponsored retirement account. With a Roth 401 (k), you contribute money after taxes and can then withdraw it tax-free once you reach retirement age.
A traditional 401 (k) plan allows you to make contributions before you pay taxes, but you'll have to pay income tax on distributions you make in retirement. With a traditional 401 (k) plan, you pay income taxes on any contribution or profit you withdraw. With a Roth 401 (k), income taxes only apply to your earnings, since you've already prepaid the money you put into the account. The 10% early withdrawal penalty from the IRS still applies to both plans.
If you expect to be in a lower tax bracket when you retire, a traditional 401 (k) may make more sense than a Roth account. However, if you're now in a lower tax bracket and think you'll be in a higher tax bracket when you retire, a Roth 401 (k) might be a better option. Elise also points out that if you want to take advantage of Roth IRA contributions but are not eligible for a Roth IRA, you can ask your employer if there is a Roth contribution option in the company's 401 (k) plan. With this type of transaction, you contribute money to a traditional IRA and then convert those funds into your Roth IRA.
