When a Roth 401(k) Makes the Most Sensehttp://www.fool.com/retirement/401k/2013/05/21/when-a-roth-401k-makes-the-most-sense.aspx Dan Caplinger
May 21, 2013
If the idea of tax-free growth throughout your lifetime sounds attractive to you, then using a Roth 401k could be one of the most valuable parts of your retirement savings strategy. But given all the other choices you have with the money you're setting aside for retirement, figuring out when a Roth 401(k) is your best option can be complicated.
Whenever you have to consider tax issues in your investing, things can get complex in a hurry. But when you step back and consider the basics of the Roth 401(k) and how it works, there are some simpler guidelines you can use to decide whether the plans are right for you.
The basics of the Roth 401(k)
By contrast, the Roth 401(k) works differently. Rather than using pre-tax money, contributions to a Roth are done on an after-tax basis, meaning that you don't get any upfront tax savings from putting money in the Roth. But in exchange for giving up the current-year tax break, you get what could be an even more valuable benefit: You'll never have to pay taxes on the income your Roth 401(k) produces, even when you withdraw it from the account in retirement. By contrast, with a regular 401(k), you do have to pay tax at your normal income-tax rate when you make withdrawals in retirement.
So when is the Roth 401(k) a smart move?
But if you're current tax rate is relatively low compared with what it could be later in your lifetime, then a Roth 401(k) makes a lot more sense. Essentially, a Roth 401(k) lets you lock in the tax rate you're paying now, forever removing the money inside the account from whatever tax rates may prevail in the future.
In particular, three sets of people should take a close look at Roth 401(k) options: