What is a Roth 401k? Well if you are familiar with Roth IRAs, the concept is basically the same: It takes after tax dollars and allows you to invest them and grow tax free.
This is the polar opposite of a traditional 401k where contributions are removed from your taxable income when invested, but grow tax deferred- meaning the will be taxed at ordinary income when withdrawn from the account.
For 2019, the contribution limits are $19,000 in aggregate, meaning you can contribute $19k to the traditional 401k, or the Roth 401k, or any mixture as long as the total doesn't exceed $19,000. Those over 50 can also contribute a top up of an additional $6,000.
However, we must remember Roth IRAs have an income cap. You can't contribute to a Roth IRA in 2019 if you earn more than $203,000. Those that earn over that amount, will not be able to utilize a Roth IRA.
Also, Roth 401k account owners have to take the required minimum distribution (NYSE:RMD) at age 70½. That's not the case for Roth IRA owners. For that reason, it's suggested that Roth 401k account owners roll their Roth 401k to a Roth IRA account before they turn 70½. That is very important.
If you think your tax rate when you retire will be lower than it is now, go with the traditional 401k. That way, you’ll avoid having to pay taxes on your contributions now, when your tax rate is high. Then, when you start to withdraw at retirement, between ages 60 and 70, you’ll pay the applicable income taxes on that money when your income tax bracket is presumably lower.
However, if you are young (say in your 20s) you may believe that your salary will keep growing as your career progresses (from an associate, for example, in the company to CEO when you're 50 years old), you will probably be in a higher tax bracket as you approach retirement. In this case, a Roth can make a lot of sense. After all, you’d be paying taxes up front at a time when the actual tax bill will be small.
This will give the Roth 401k decades of tax free growth!
There are no tax consequences when you take money out of a Roth 401k when you're 59½ and you have met the five-year rule. For example, if you need $10,000, you simply take out $10,000 from the account, and no taxes are due. If you take a similar distribution from a traditional 401k plan, the money you withdraw is subject to ordinary income tax.
Also, if an employer matches on your Roth 401k contributions, those contributions will go into a Traditional 401k, not into the Roth 401k account. Then, when you roll over the 401k into an IRA, the employee contribution on the Roth side will rollover into a Roth IRA account and the employer contributions will roll into a traditional IRA account.
Using a mix between the two can be the most advantageous. The question would be what is your personal preferred mixture? There is no way of knowing... however, you can hedge your bets by using both tools.
Just as you diversify the stocks and bonds in your retirement portfolio, there’s a strong case for diversifying your tax exposure in retirement. By using both a Roth and a traditional 401k, you’d lower at least a portion of your current taxable income, maintain a diversified retirement plan, and giving yourself some cover if future tax rates change.
So if your younger you have more to gain from a Roth 401k. The current tax deduction of a traditional 401k isn't as valuable as the decades of tax free growth you would get from a Roth 401k.
As your career progresses, you may not have an opportunity to participate in a Roth IRA later in life, due to the income limitations. So filling up that tax free bucket now may be your only chance to enjoy tax free withdrawals not subject to RMDs (once the 401k is rolled into a Roth IRA).
Current older workers can benefit as well by gaining access to a tax free account they may not have had available to them when they were younger (Roth IRAs didn't exist until Senator William Roth proposed the idea in the Tax Payer Relief Act of 1998).
Again, the best thing to do is hedge your bets and contribute to both. No one knows what some administration will do 20 or 30 years from now, let alone a post-Trump admin. So putting all your eggs in one type of account basket, is a risk in and of itself.
Money, Inc. has a calculator as well: 401k Calculator
Lastly, take a look at this handy IRS comparison chart of Roth 401k's, Roth IRAs, and traditional 401k's. Remember, the best strategy is to roll that Roth 401k into a Roth IRA before age 70 1/2 and avoid any RMDs.