Is the Roth 401K for me?

Over the last couple of weeks, I have had a lot of people ask me whether the Roth 401K is appropriate for them. The answer is that it depends on the individual. If one believes that tax rates in the future will be the same or higher than today, then the Roth 401k is worth consideration. However, many people I know are currently in a high tax bracket and paying high income taxes in states such as Washington DC, Maryland, and Virginia. In this circumstance, one may be better off defering taxes to retirement when one may be in a lower tax bracket and possibly retired to a no icome tax state such as Florida.

Also, many people I know are exposed to paying the Alternative Minimum Tax (AMT). tax-deferred 401k contributions help to lower one's overall take home pay, thus limiting their exposure to paying AMT.

People have also asked me about the matching 401k contributions that employers provide. Is there a benefit to having the employer contributions matched into a Roth 401k plan versus a standard 401k? Unfortunately the majority of employers will only match contributions on a pre-tax basis. This complicates matching contributions in a Roth 401k, because one may have tax-free and tax-deferred money in a Roth 401k due to employer contributions that were not taxed. This complicates the process of figuring out tax owed once withdrawals are made.

Check with your financial advisor to determine if the Roth 401k is right for you.