To Roth, Or Not to Roth, That is the 401K Question

While Shakespeare was concerned with “to be or not to be,” we’re more concerned with whether you’re prepared “to be or not to be” financially set up for retirement.

Friends, Romans, Clients, lend me your ears! There are pros and cons to the 401K vs. the Roth 401K. As you likely know, any kind of 401K is an employer-sponsored retirement program where a select percentage of your salary goes into a savings account where it will grow until you retire. The biggest difference between the two is when you’ll pay taxes. (Sorry, you’ve got to pay them sometime.) First, let’s consider the traditional 401K. If your salary is $100,000, and you invest $22,500 (the contribution limit for 2023), your taxable income will be $77,500. While you’ll get an immediate tax break now, you’ll have to pay those taxes on your contributions and any earnings when you withdraw them.

The Roth 401K, on the other hand, comes with no tax benefit when you initially contribute. While you’ll have to pay taxes on your contribution when you invest, your money will grow and can be withdrawn tax-free. And, unlike a Roth IRA, there are no income limits for a Roth 401K.

Generally, when making a decision, it’s best to consider your current and future tax bracket. If you feel like you will be in a higher tax bracket when you start withdrawing your funds, the Roth 401K may be a good choice.

At the end of the day, the decision is yours. To thine own self be true.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Centrix Wealth Partners is not a registered broker/dealer and is independent of Raymond James Financial Services.

The information contained does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Centrix Wealth Partners and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results.

401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free.

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.