a lot of buzz
There's recently been a lot of buzz about converting traditional IRAs to Roths. But what about a Roth 401(k), if your company offers one? Should you take the tax hit on your contributions in exchange for tax-free withdrawals later on, as is the case with Roth 401(k)s, or should you go the traditional 401(k) route? In that case, you'll make pretax contributions and have your balance taxed upon withdrawal.
As with the Roth versus traditional IRA decision, this one rests on one big swing factor: whether you expect to be in a higher tax bracket in retirement than you are now. But unless you're quite close to retirement, the answer to that question is all but unknowable.
However, a few categories of individuals are good candidates for making all or at least part of their 401(k) contributions Roth-style. The first would be younger savers who aren't earning a lot currently but may do so in the future. For them, their own earnings trajectory, plus the possibility that future tax rates will trend higher across the board, make a strong argument for a Roth 401(k) and IRA.
Another good candidate for Roth 401(k) contributions is the upper-income individual who has a lot of retirement assets sitting in a traditional 401(k) plan but has heretofore earned too much to contribute to a Roth IRA. Because there's no income limit on Roth 401(k) contributions, the vehicle offers a great way for such individuals to get some of their retirement assets into the Roth column.
This article discusses the topic in-depth, and my book, 30-Minute Money Solutions, includes a chapter with a worksheet to help you factor in all of the key variables. If you're conflicted after you investigate the topic, one idea is to split your contributions between the two types of vehicles.