These days, most 401k and 403b plans give their participants the option of contributing to the “traditional” version or the “Roth” version.
- With the traditional version, the amount you contribute reduces your taxable income in the current year, and then you pay taxes on distributions down the road.
- With the Roth version, you forego a current year break in exchange for a promise from the federal government that withdrawals from that account won’t be taxed when taken out upon reaching retirement age.
With these accounts, unless you are paying no federal income taxes or are in one of the lowest few brackets, our advice is simple:
- If going with the Roth version of the 401k or 403b plan for your salary deferrals, and you won’t able to hit the annual max of $18,000 ($24,000 if 50 or older) in 2017 or $18,500 ($24,500 if 50 or older) in 2018, then opt for the traditional version and use the taxes you’ll save to increase your salary deferrals.
Your initial goal should be to put away the maximum allowable amount into your retirement account at work each year.? With old fashioned pension plans not very common anymore and Social Security a huge question mark, it’s up to you to put away enough money to fund a comfortable retirement.? Taking advantage of the tax savings for the traditional 401k plan to put away more money each year seems to be the prudent way to go.
Once you can hit that annual max, you can decide whether saving taxes today or saving taxes in the future is more valuable to you and your family.