Deciding between Roth and pre-tax contributions typically comes down to your current tax rate and how you feel about the future of taxes.
Given that Roth dollars are taxed at the time they are contributed and pre-tax dollars are taxed when the dollars are withdrawn, deciding on which to make ultimately comes down to your tax bracket and you feel about taxes in the future.
Roth IRAs are an extremely powerful savings tool! These accounts allow you to contribute after-tax dollars, then the dollars grow tax-free and have tax-free qualified distributions.
Keep in mind, that if your combined marginal income tax rate (state, federal, and local) is less than 25%, you may want to consider contributing to a Roth IRA. If your combined rate is greater than 30%, you may want to consider making pre-tax contributions. If you are in-between, you may need to account for other factors, such as your expected tax rate at retirement, before making a decision.
Our typical rule of thumb when deciding between contributing to Pre-Tax or Roth 401k is to consider your current tax situation. If you are in a tax bracket of 32% or higher, it may be better to invest in the Pre-Tax account because of the tax deduction it provides. If you are in the 24% or lower, you may want to consider investing in Roth accounts to take full advantage of our current low tax environment. We believe tax rates will only increase in the future.
Check out the videos below to get a detailed look at which account type is right for you.
Video: Roth 401(k) vs. Roth IRA: Which One Is Better?