24 Nov Should I choose a Roth 401(k)?

Q. My employer just added a Roth 401(k) option. Should I do it? I make $62,000 a year and I contribute the max to my regular 401(k). My only other retirement savings is one Roth IRA worth about $7,000. I’m 39 and married, and my wife doesn’t work. She has about $15,000 from an old 401(k).
— Saver

A. A Roth 401(k) may be a good option.

The maximum aggregate contribution for 2015 is $18,000 for 401(k) plans.

Because you are already contributing the maximum to your traditional 401(k), you would not be able to also contribute the full amount to the Roth 401(k), said Alison Williams, a certified financial planner with Stonegate Wealth Management in Oakland.

You’d have to pick one or divvy it up.

Williams said because you are young, the 401(k) may be a better idea.

“Given your household income, we can assume you are currently in a reasonably low tax bracket,” she said, noting this is only based on your earned income and not any other income you may have, such as from rentals, interest or dividends.

Keep in mind that if you choose the Roth, your taxable income today will no longer be lowered by the amount of your contributions. We just don’t want you to have any nasty surprises come April 15.

Your decision should also hinge on what you think will happen to tax rates in the future.

“We do not know what changes will be made to tax laws in the reasonably near future, let alone in 15 to 20 years when you are eligible to begin making penalty-free withdrawals,” Williams said. “It’s a gamble on whether you believe your tax bracket will be higher or lower in the future. If you believe it will be higher, begin contributions to the Roth.”

Also, keep in mind that if you would like to put more aside for retirement, you can consider an IRA or a Roth IRA. This will enable you to save an additional $5,500 (2015) annually, tax-deferred, she said.

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This story was first posted in December 2015.