Roth 401(k) Over Regular 401(k)

Jamie asks Dave the benefit of a Roth 401(k) over a regular 401(k). Dave's answer is a simple one.

QUESTION: Jamie on Facebook asks Dave the benefit of a Roth 401(k) over a regular 401(k). Dave’s answer is a simple one.

ANSWER: The Roth 401(k) grows tax free. If the money in your 401(k) when you get to retirement is $500,000, almost everything that’s in that account will be growth. If it’s a traditional 401(k), then 100% of what’s in the account will be taxable. Taxes on $500,000 are about $150,000.

If it’s in a Roth 401(k), almost all of that $500,000 will be growth, and the money you’ve put in is money that you’ve already paid taxes on, so it will be completely tax free as you draw it out. So the difference if you have $500,000 in your account at retirement between the Roth 401(k) and a traditional 401(k) is $150,000 worth of taxes. That’s a lot. So you do the Roth 401(k).

If your company matches, they don’t match with the Roth 401(k). They have to match in the traditional–that’s the law. That doesn’t matter. The bulk of what goes into your account is going to be money you put in there, and growth.