Roth 401k vs Traditional 401k (Through Your Employer)

In this post I’ll be explaining the importance of making deposits to a Roth 401k through your employer. To begin what we need to first look at is your current tax rate and more importantly what you think your tax rate will be in your retirement years.

If you do expect that your future tax rate will be higher than what it is now, you would probably better off making deposits into a traditional 401k. On the other hand, if you feel that you will be in lower tax rate in your retirement years then making deposits into a Roth 401k would be the better option.

If you feel you will need these funds before the age of 59.5 then a Roth IRA is your best choice over any type of 401k due to the ability to take money out without penalties.

Another thing to consider would be if your company offers matches. If they do offer a match then those will go into a traditional 401k bucket even if you are making your deposits into a Roth 401k. 

It’s also very important to keep in mind the contribution limits per account type. Currently in 2020 an IRA is capped at $6,000 or $7,000 if you are over age 50. 401k’s are capped at $19,500 or $26,500 if you are over age 50. 

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