Sometimes it’s better to get taxes out of the way earlier when using a 401(k) to save for retirement. The case for Roth 401(k)s:
Financial planner David Born of Orinda, Calif., advises a couple in the top tax bracket who contribute to Roth 401s rather than traditional 401s, even though it means they pay more in taxes now.
With a Roth 401, income is invested after taxes have been taken out, instead of before as with a traditional 401. Distributions from a Roth 401 are tax-free, while distributions from a traditional 401 are taxed as regular income. Unlike Roth individual retirement accounts, Roth 401s have no income limits and you’re able to contribute up to $19,500 a year. Workers over 50 can contribute up to $26,000 a year.
But Roth 401s are worth considering for many other highly paid workers. Here are six reasons why one may make sense for you: You fear taxes are going up in the future. Taxes are currently low by historical standards, but the government has spent trillions of dollars during the pandemic and taxpayers will need to pay the bill. Many fiscal experts think that taxes—particularly for the rich—are headed up.
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