I’m currently enrolled in my company’s 401(k) plan, which matches up to 6 percent of my contribution. I’m contributing 6 percent, but I want to save more. My company also has a Roth 401(k) plan, which they don’t match. Which is more advantageous, increasing my current 401(k) contribution, or putting my excess contribution into the Roth 401(k) plan?

You’re doing the right thing by saving enough in the traditional plan to take full advantage of your employer’s matching contribution. But if you can afford to save more, there’s a compelling case for doing it in the Roth 401(k).

The main difference between the plans is when your money is taxed. You pay no current tax on regular 401(k) contributions but your future withdrawals are taxable. The Roth contributions don’t reduce your current tax bill, but your withdrawals are tax-free after you’re 59 1/2 and have owned the account for five years. (You must start taking annual tax-free withdrawals from a Roth 401(k) after you retire or turn 70 1/2, whichever comes later. But you can avoid that requirement by transferring your Roth 401(k) into a Roth IRA, which doesn’t require withdrawals.)

Which plan is better? If your marginal tax rate will fall in retirement, the traditional plan has the edge. If your marginal tax rate will rise, the Roth works better for you. Since future tax rates are unknowable, it’s sensible to save in both plans. Besides, a Roth account gives you extra flexibility in retirement. You can take a big withdrawal to cover an emergency without affecting your tax bill. (Roth withdrawals aren’t included in the formula that determines tax treatment of your Social Security benefit.)

THE BOTTOM LINE If you’re already getting your employer’s full matching contribution in a traditional retirement plan, it’s usually smart to put extra savings into a Roth account.


advertisement | advertise on newsday