Which 401k is Best: Traditional or Roth?
By Nicole PolancoSeptember 7, 2018
401k: Traditional vs. Roth
You’re always told to contribute to your 401k and to maximize your contributions, but the type of 401k you should choose is not talked about as frequently. In this post, we dive into the pros and cons of a Traditional 401k and a Roth 401k to help you decide which is a better fit for you.
When it comes down to retirement, it’s engrained in your mind to always maximize your contributions to your 401k, especially if your employer offers 401k matching. However, it’s up to you to choose between a Roth 401k or a Traditional 401k.*
The main differences between the two choices come down to when the taxes are paid and if you anticipate a growing salary. A growing salary could push you into a higher tax bracket in the future.
A Roth 401k is a great place for a young investor - you’re are just starting off in your career, and you’re probably in a lower tax bracket. However, higher-earning investors can still benefit from a Roth 401k by getting the benefits of the tax-free withdrawals when distributions begin.
One of the main differences comes down to when you pay the taxes on either the Roth or Traditional 401k.
In a Traditional 401k, the contributions are made with pre-tax dollars, and, at withdrawal, the money is considered ordinary income and you pay taxes in the future, when money comes out of the account (once you are 59 ½). The benefit here is that your money continues to grow tax-deferred until the time of withdrawal. Most investors will choose this option if they expect their current tax bracket to be higher than their expected tax bracket at retirement.
In a Roth 401k, the contributions are made with after-tax dollars, so withdrawals are tax-free once you reach age 59 ½ having held the account for 5 years (without incurring a penalty). The benefit here is that your money is taxed up-front, a huge plus to young investors in a low tax bracket who expect to retire at a higher tax bracket. However, if tax rates were ever significantly reduced, this would hurt individuals who contribute to a Roth 401k.
Some investors have the choice to split contributions between both a Traditional and Roth 401k up to $18,500 in 2018 (with an option of an additional $6,000 if you are age 50+) however, both Traditional and Roth 401k accounts do have a required minimum distribution (RMD) at age 70 ½.
There is no “wrong” choice when it comes to picking Traditional vs. Roth 401k. Ultimately, the most important decision is to make sure you are contributing to your retirement plan in some way.
*One important note - not every company offers a choice between a Traditional and a Roth 401k.
Nicole Polanco is an Associate Wealth Advisor at Chicago Partners Wealth Advisors. She graduated from the University of Illinois Champaign-Urbana with a B.S. in Finance and is currently working towards her CFP designation.
1Zweig, Jason, Value Should Do Better. But When Is Anybody’s Guess, Wall Street Journal, April 27, 2018.
2JPM Guide the Markets, U.S., 2Q 2018, as of March 31, 2018, p 9.
Important Disclosure Information
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.
September 7, 2018
401k: Traditional vs. Roth
You’re always told to contribute to your 401k and to maximize your contributions, but the type of 401k you should choose is not talked about as frequently. In this post, we dive into the pros and cons of a Traditional 401k and a Roth 401k to help you decide which is a better fit for you.
When it comes down to retirement, it’s engrained in your mind to always maximize your contributions to your 401k, especially if your employer offers 401k matching. However, it’s up to you to choose between a Roth 401k or a Traditional 401k.*
The main differences between the two choices come down to when the taxes are paid and if you anticipate a growing salary. A growing salary could push you into a higher tax bracket in the future.
A Roth 401k is a great place for a young investor - you’re are just starting off in your career, and you’re probably in a lower tax bracket. However, higher-earning investors can still benefit from a Roth 401k by getting the benefits of the tax-free withdrawals when distributions begin.
One of the main differences comes down to when you pay the taxes on either the Roth or Traditional 401k.
In a Traditional 401k, the contributions are made with pre-tax dollars, and, at withdrawal, the money is considered ordinary income and you pay taxes in the future, when money comes out of the account (once you are 59 ½). The benefit here is that your money continues to grow tax-deferred until the time of withdrawal. Most investors will choose this option if they expect their current tax bracket to be higher than their expected tax bracket at retirement.
In a Roth 401k, the contributions are made with after-tax dollars, so withdrawals are tax-free once you reach age 59 ½ having held the account for 5 years (without incurring a penalty). The benefit here is that your money is taxed up-front, a huge plus to young investors in a low tax bracket who expect to retire at a higher tax bracket. However, if tax rates were ever significantly reduced, this would hurt individuals who contribute to a Roth 401k.
Some investors have the choice to split contributions between both a Traditional and Roth 401k up to $18,500 in 2018 (with an option of an additional $6,000 if you are age 50+) however, both Traditional and Roth 401k accounts do have a required minimum distribution (RMD) at age 70 ½.
There is no “wrong” choice when it comes to picking Traditional vs. Roth 401k. Ultimately, the most important decision is to make sure you are contributing to your retirement plan in some way.
*One important note - not every company offers a choice between a Traditional and a Roth 401k.
Nicole Polanco is an Associate Wealth Advisor at Chicago Partners Wealth Advisors. She graduated from the University of Illinois Champaign-Urbana with a B.S. in Finance and is currently working towards her CFP designation.
Important Disclosure Information
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.