Traditional 401(k) or Roth 401(k)? The Answer for Young People.

This is pretty straight forward. The only difference between a Traditional 401(k) and a Roth 401(k) that you need to know is that one is pre-tax money (Traditional) and the other is after-tax money (Roth).

The decision between putting your money in a Traditional 401(k) vs. Roth 401(k) can be answered by asking yourself this single question:

Do you think you will make more money now, or do you think you will make more money when you get older?

If you think you will make more money later in life (i.e. be in a higher tax bracket), then you should put all your money in a Roth 401(k) right now. Money that goes into a Roth 401(k) is taxed at your current income bracket. The big benefit of the Roth 401(k) is that all this money grows TAX FREE.

In a traditional 401(k), your contributions go into the account pre-tax, meaning you never paid tax on this money. Once you begin to take money out of this account in retirement, you have to pay income tax on your contributions AND the earnings your money made throughout the years.

At some point in your life you will begin to make really good money and a Roth option may not make as much sense. However, those early investing years of putting money into your Roth 401(k) will look really nice in retirement when you take money out of the account and don’t have to pay tax on it.

So, if you are reading this and saying “shit I don’t really know what account I have.” It’s ok. You can either log in to your retirement account online and change your contributions to a Roth option or ask your HR person to help you update your retirement account contributions to be directed to a Roth.

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