The great Roth 401(k) debate

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Q. I invest enough in my 401(k) to get the match. That’s 6 percent of my salary. I’m thinking of either increasing the savings or using a Roth IRA instead. How can I decide?
— Roth debating

A. Good for you for wanting to save more.

The question “To Roth or not to Roth?” is a pretty common one, so let’s look at how both accounts work.

The large difference between the two is whether you pay taxes now or pay taxes later, said Chip Wieczorek, a certified financial planner and investment adviser with Tradition Capital Management in Summit.

“With a traditional 401(k), contributions are made with pre-tax dollars, helping to lower your income tax bill in the current year,” Wieczorek said. “Your contributions and earnings grow tax-deferred then at retirement, withdrawals will be taxed as ordinary income.”

You didn’t say if your 401(k) was a traditional one or a Roth, but many employers today offer both.

When using a Roth 401(k), there is not current tax deduction and contributions are made with after-tax dollars.

However, just like a traditional 401(k), contributions and earnings grow tax-deferred until you withdraw them in retirement, he said.

“The major benefit is that withdrawals of both contributions and earnings are tax-free at age 59 1/2 as long as you’ve held the account for five years,” he said. “Lastly, once rolled to a Roth IRA, there is no Required Minimum Distribution (RMD) requirement after age 70 1/2 like there is with a 401(k).”

With most 401(k) plans, you don’t have to choose one or the other, so it usually makes sense to contribute a portion to both accounts, Wieczorek said.

“Paying some taxes now on a Roth contribution will help you control your retirement income by balancing taxable and tax-free withdrawals,” he said. “Likewise in the current year, having both types of 401(k)s will give you the flexibility to vary your contributions depending on bonuses, commissions, stock vesting or any other variable compensation.”

If you have variable income, he said, in a low income year you can allocate more to your Roth 401(k) and in a high income year, allocate less or none.

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This post was first published in September 2016. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.