The entire theory behind retirement accounts is that you putting money in pretax, when your tax bracket is higher, and you'll be taking out money from the retirement plan with your tax bracket is lower. HOWEVER, with what's been happening with tax rates, that theory may not necessarily be true anymore. If you're not in a tax situation, you might want to put money into the Roth option of your 401(k).
Craig W Smalley EA
Admitted to Practice before the Internal Revenue Service
If you have both options, it would be best to utilize both to diversify your taxes at retirement. Depending on the year, you will be able to decide if you'd like to withdraw from the pre-tax or after-tax account.
If you are young and have many years until retirement, then perhaps, having a Roth after-tax account can be more beneficial. Even if you expect to remain in the same tax bracket, a Roth option requires tax payments right now, but any investment gains from this point will be tax-free. If a person has many years before retirement, this tax-free benefit can amount to a significant difference over the years.
If you are going to be in a lower tax bracket in retirement than you are now, it would generally be beneficial to go with the pre-tax contributions. If you are going to be in a higher tax bracket in retirement than you are now, it woud generally be beneficial to go with the after-tax contributions. If you are going to be in the same tax bracket in retirement as you are now, it does not matter which you use.
I will posit a fourth option - if you do not know what your tax bracket will be in retirement, then it may make sense to utilize both pre-tax and after-tax options.
So, if you are a ways off from retirement (say 15-20+ years), we just don't know what tax rates will be that far out. There is a lot that can change in the tax code between now and then. So, it could make sense to utilize both pre-tax and after-tax. That will provide you flexibility in retirement as well as provide tax diversification in retirement.
Generally speaking, if you're in a higher income tax bracket now than you'll likely be in retirement, getting a tax-deduction now for your regular 401(k) contribution will be more valuable to you. On the other hand, if you're in a lower tax bracket now vs. your expected tax bracket in retirement, then an after-tax contribution to the Roth account in your 401(k) may be more valuable.
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