How should I be contributing to my 401(k), traditional or Roth?
"I wrote a brilliant guest post at Don't Mess With Taxes, titled Roth IRAs and Your Retirement Income. (Note - this article now reflects 2012 rates. Just updated) Simply put, it's an ongoing question of whether your taxes will be higher now than at any point in the future. If you are in the 25% bracket now, it would take quite of bit of money for your withdrawals to put you in that bracket at retirement. In the case of the IRA, you have the opportunity to convert in any year between now and retirement if your rate that year drops for whatever reason.  The simplest case is if you are now in the 25% bracket. I say go pre-tax, and track, year by year what your withdrawal would be if you retired today.  At 15%, but with a good chance for promotion to the 25% bracket, start with Roth flavor and then as you hit 25%, use a combination. This approach would smooth your marginal rate to stay at 15%.  To give you a start to this puzzle, in 2012, a couple has a $11,900 standard deduction along with 2 exemptions of $3800 each. This means the first $19,500 in an IRA comes out tax free at retirement. If you believe in a 4% withdrawal rate, you need a retirement account containing $500K pretax to generate this much money. This tick up with inflation, 2 years ago, it was $18,700 and $467K respectively. This is why those who scream ""taxes will go up"" may be correct, but do you really believe the standard deduction and exemptions will go away?  Edit - and as time passes, and I learn more, new info comes to my attention. The above thoughts not withstanding, there's an issue of taxation of Social Security benefits. This creates a The Phantom Tax Rate Zone which I recently wrote about. A single person with not really too high an income gets thrust into the 46% bracket. Not a typo, 46.25% to be exact." I'm of the opinion that it doesn't matter much unless something in your life changes in retirement. And since many retirement planners assume a default income target of 80 percent of pre-retirement income, I figure many people's tax bracket isn't moving much. The most interesting reason I know to Go Roth in a 401k is limits. You can only contribute like $17k, whether Roth or not. In a traditional contribution, some of the 17k you put in goes to taxes when taken out, but in a Roth contribution you pay taxes up front. So if you have more than $17k to invest, Roth lets you sneak some more into the system. "The Finance Buff discusses why the Roth 401k is often disadvantaged compared to a Traditional 401k in the article The Case Against the Roth 401k, including the following reasons (paraphrased): Contributions to the 401k come from the ""top"" of your highest tax bracket rate but withdrawals fill in from the ""bottom"".  For example, suppose you are in the 28% tax bracket.  Every marginal dollar you contribute to the Traditional 401k reduces your tax burden by .28 cents.  However, when withdrawing, the first $10,150 of income is tax-free (from standard deduction and exemption, 2014 numbers; $20,300 for married couples, joint filing).  The next dollars are at the 10% tax bracket, and so on.  This is an advantage for the Traditional 401k only if you earn less when withdrawing than you did when contributing, a reasonable assumption. Avoid High State Income Tax. There are many states that have low or no state income tax.  If you live in a state with a high income tax, paying tax now through the Roth 401k reduces the benefit of moving to a state with a lower income tax rate. Avoid triggering credit phaseouts. Many tax credits (e.g. student loan interest, child tax credit, Hope credit, Roth IRA eligibility, etc.) begin phasing out as your income increases.  Contributing to the Traditional 401k can help you realize more of those credits when you starting running up against those limits. As described in the article, if these items don't apply, contributing to the Roth 401k can be a valuable component of tax diversification."
"Changes in graduated income tax rates don't necessarily drive how you should allocate money to a Traditional vs Roth account (true for both IRA or 401k). What does drive this decision is what your income tax rate is now compared to what you believe your rate will be when you retire. So, if you expect the tax rate change to still be in effect when you retire, it doesn't matter if the change is a tax increase or decrease; your previous allocation could likely remain the same. This means that if Congress passed the change effective immediately, it would be too late for you to make a meaningful adjustment. But if Congress passes the change effective next year, then most likely your tax rate will decrease for next year, meaning you are probably better off switching all Roth allocations to Traditional, and then switching them back to whatever allocations you have now for next year. The reverse would be true if you knew about an upcoming tax increase (in which case you would load up Roth this year and then switch back to whatever you had for next year). That being said, regarding after the fact reallocation considerations, I suppose it would be fair to say that if the country is accustomed to a higher tax rate, and then rates are dropped, if spending is not cut to make up for it, then rates would likely have to go up again in the future to make up the difference. If you believe that will happen then Roths would become a little more attractive since rates would be lower than what you expect them to be when you retire. As a side note, if you ever had reason to believe that Congress was going to move away from the ""graduated income tax"" structure, all bets are off. For example if the income tax was replaced with a tax on spending such as the FairTax, then in the interim period Roths would become worthless and you'd want to switch to Traditionals until the change went into effect. (And then once in effect both Roths and Traditionals would be pointless.)" Taking all your assumptions: With Roth, you take $6112 from work, (let's call you tax rate 10%) pay $612 in taxes, and contribute $5500 (the max if you are younger than 50).  This $5500 will grow to $21,283 in 20 years at 7% annual growth ($5500*(1.07^20)), and you will pay no additional taxes on it. With the traditional IRA, you take $6112 from work, pay $612 in taxes, and contribute $5500.  You will receive a tax deduction at tax time of $612 for the contribution.  This money will also grow to $21,283.  This will be taxed at your ordinary income rate (which we're calling 10%), costing you $2123 at the time of withdrawal.  You will have $19,155 left over. EDIT: If you invest your tax savings from every contribution to the Traditional IRA, then the numbers wash out.  Perhaps a pivotal question is whether you believe you will have greater taxable earnings from your investments in retirement than you have in taxable earnings today -- affecting the rate at which you are taxed. "The Roth/Traditional decision is complex, but can be broken down into a set of simple rules.  Ideally, you want to choose to tax your money at the lowest possible rate. This specifically refers to your marginal rate, the rate you last $100 was taxed or next $100 of income with be taxed. That, in itself, is another issue, answered with questions here discussing marginal rates.  My suggestion has been that if you are in the 15% bracket, use Roth. And continue to do so until you hit 25%. At that point, begin to shift to the traditional, pre-tax 401(k) or IRA. (My article The 15% solution, goes into detail on this, although it references the 2013 tax rates. I need to re-edit). If you are already in the 25% bracket, I'd suggest just going pre-tax. Given the ability to convert, it's not as if there are 2 points in time (deposit and withdrawal) but you can decide every year if your situation changes. It's not uncommon to get married, have a baby, buy a house, and find you just dropped back down to 15% marginal rate when you were solidly 25% prior.  Let me explain why you should go 100% pretax if already at 25%.  A single person hits the top of the 15% bracket (in 2017) at $37,950 taxable. Add the standard deduction and exemption, and you are at $48,350. The tax on this is $5226, less than 10% average, despite the next $100 being taxed at 25%. It would take over $1M to have an account large enough to withdraw $40K/yr.  If you blow through that number, you hit 25%, I agree, but why pay 25% now, for sure, to avoid 'maybe' hitting 25% later? You have decades of opportunities for conversion, and even more when the funds are transferred to IRAs if you have a job change. (And the conversion discussion has multiple layers when the IRA is involved) Say you are 'too' successful. You are hitting $2M before age 55. If you retire post-55, you can withdraw from the 401(k) penalty free. But, you have 15 years before you'd start to take SS benefits. 15 years to use conversions, even if pushing into 25%, to reduce the impact of SS taxation.  My advice is not a set-and-forget solution. It's an annual evaluation of the plan for the coming year.  Further notes on my choice of ""15% Solution"" - This is the 2017 tax table for singles -  I note that median individual income is ~$30K which puts that median single at ~20K taxable. This is where the analysis begins. This earner might have upward mobility, to reach the 25% bracket and begin to save pre-tax. The goal would be to have a mix of pre/post tax money, so that over the course of their life, the 25% bracket was avoided, perhaps completely.  In general, my writing tend towards the second highest quintile, the 60-80% slice of the population. The numbers might appear arbitrary, but, in the end, the discussion has to start someplace. The concept I described here is best implemented by the single or couple who is still at 15%, but soon pushing higher than the 15/25 line. This enables them to start by saving in the Roth, and slowly shifting towards pre-tax. The final mix at retirement depends on that timing as well as their opportunities for conversions along the way.  Part of my focus on that line is that the differential is greatest in bracket shifts between 15 and 25%. Much of the benefit in the whole IRA/401 discussion is in that shift, depositing at 25%, yet withdrawing at 15%. The 28% couple might wish to avoid the 33% bracket at retirement, but that level of income impacts far fewer people, and fewer still that are either reading these boards or my other writing." "The ""Deferral"" for the 401k means that you're not collecting your pay immediately, but instead diverting it to a retirement account (Roth 401k in this case). This article defines deferral well: What is the difference between a regular 401(k) deferral (pre-tax) and a Roth 401(k) deferral?  Under either a regular 401(k) deferral or a Roth 401(k) deferral, you   make a deferral contribution by electing to set  aside part of your   pay (by either a certain percentage or a certain dollar amount).  For   a regular 401(k) deferral, the  taxable wages on your W-2 are reduced   by the deferral contribution; therefore, you pay less current income   tax.   However, you will eventually pay tax on these contributions and   earnings when the plan distributes the regular  401(k) deferrals and   earnings to you.  The result is that the tax on the regular 401(k)   deferrals and earnings is only  postponed.  A Roth 401(k) deferral is an after-tax contribution, which  means you   must pay current income tax on the deferral.   Since you have already   paid tax on the deferral, you won’t pay tax on it again when you   receive a distribution of  your Roth 401(k) deferral.  In addition, if   you satisfy cer tain distribution conditions, then you won’t have to   pay tax  on the earnings either.  This means  that the distribution of   the Roth 401(k) earnings can be tax free not just tax  postponed. Traditionally, this deferred compensation typically was directed to a 401k, but now that Roth 401k is another available option, deferred compensation can be directed there as well." "I'd suggest you avoid the Roth for now and use pretax accounts to get the greatest return. I'd deposit to the 401(k), enough to get as much match as permitted, then use a traditional IRA. You should understand how tax brackets work, and aim to use pre-tax to the extent it helps you avoid the 25% rate. If any incremental deposit would be 15% money, use Roth for that. Most discussions of the pre-tax / post tax decision talk about 2 rates. That at the time of deposit and time of withdrawal. There are decades in between that shouldn't be ignored. If you have any life change, a marriage, child, home purchase, etc, there's a chance your marginal bracket drops back down to 15%. That's the time to convert to Roth, just enough to ""top off"" the 15% bracket.  Last, I wouldn't count on that pension, there's too much time until you retire to count on that income. Few people stay at one job long enough to collect on the promise of a pension that takes 30+ years to earn, and even if you did, there's the real chance the company cancels the plan long before you retire." On the statement it now tracks how much is contributed to the account   pre and post tax. This is the key. Your withdrawals will be proportional. Assuming you have contributed 90% in regular contributions (pre-tax) and 10% in Roth (post tax), when you withdraw $1000, it will be $900 from the regular (taxed fully) and $100 from the Roth (not taxed, assuming its a qualified distribution). Earnings attributed proportionally to the contributions. I agree with you that it is not the best option, and would also prefer separate accounts, but with 401k - the account is per employee. Instead of doing 401k Roth/Non-Roth consider switching to Regular 401k and Roth IRA - then you can separate the funds easily as you wish. You asked specifically about the ROTH IRA option and stated you want to get the most bang for your buck in retirement.  While others have pointed out the benefits of a tax deduction due to using a Traditional IRA instead, I haven't seen anyone point out some of the other differences between ROTH and Traditional, such as: I agree with your thoughts on using an IRA once you maximize the company match into a 401k plan.   My reasoning is: I personally prefer ETFs over mutual funds for the ability to get in and out with limit, stop, or OCO orders, at open or anytime mid-day if needed.  However, the price for that flexibility is that you risk discounts to NAV for ETFs that you wouldn't have with the equivalent mutual fund.  Said another way, you may find yourself selling your ETF for less than the holdings are actually worth.  Personally, I value the ability to exit positions at the time of my choosing more highly than the impact of tracking error on NAV. Also, as a final comment to your plan, if it were me I'd personally pay off the student loans with any money I had after contributing enough to my employer 401k to maximize matching.  The net effect of paying down the loans is a guaranteed avg 5.3% annually (given what you've said) whereas any investments in 401k or IRA are at risk and have no such guarantee.  In fact, with there being reasonable arguments that this has been an excessively long bull market, you might figure your chances of a 5.3% or better return are pretty low for new money put into an IRA or 401k today.  That said, I'm long on stocks still, but then I don't have debt besides my mortgage at the moment.  If I weren't so conservative, I'd be looking to maximize my leverage in the continued low rate environment. Put in the maximum you can into the 401(k), the limit should be $16,500 so long as the highly compensated rules don't kick in. Since you cannot deduct the traditional IRA, it's a great option to deposit to a traditional IRA and immediately convert that balance to a Roth account. That puts you at $21,500/yr saved, nearly 18%.  There's nothing stopping you from investing outside these accounts. A nice ETF with low expenses, investing in a stock index (I am thinking SPY for the S&P 500) is great to accumulate long term. You are close to understanding, but it looks like you are slightly off: regular 401K - The amount you contribute is taken out of your taxable income for tax purposes in the tax year you earn it. However, when you take it out at retirement that withdrawal counts as income for tax purposes. (You pay the tax on the money later) Roth 401K - The amount you contribute is not taken out of your taxable income for tax purposes in the tax year you earn it. However, when you take it out at retirement that withdrawal will not as income for tax purposes. (You pay the tax on the money now.) Additional benefit: You don't pay tax ever on the gains. "With no match, the traditional 401(k) for someone otherwise in the 15% bracket makes little sense. I'd suggest contributing just enough if you were in the 25% bracket to be in the taxable 15% but no more. Use a Roth IRA if you are saving more than that.  I'm adding this based on OP's statement that the fees on the 401(k) range .8-1.4%. I wrote an article Are you 401(k)o’ed? in which I discuss how fees of this range negate the benefit of the mantra ""save at 25% to withdraw at 15%"" and if one were in the 15% bracket to start, this level off fee will cost you money in no time at all.  The people advising you to max out the 401(k) first, given the rest of your situation and that of the account, are misguided. I'd given them the benefit of the doubt and assume they don't have all the details.  And with all due respect to the other posters here, everyone of them a bright, valued colleague, your answers should be addressed to the OP's exact situation. 15% bracket, no match, high fees. I suspect some of answers will change on reviewing this." Part of the difficulty in this sort of planning is that you are also betting on future tax rates and comparing them with current taxes.  If you are in a low tax bracket now, but expect to be in a higher one when you take the money out, it is better to pay the taxes now.  If you are in a high tax bracket now, but expect to be in a lower one when you retire/take the money out, then it is better to defer the taxes until then.  If you think that future sessions of Congress will decide to tax withdrawals from Roth accounts, then you should contribute to traditional accounts.  The problem is that you don't know with certainty what the future will bring. So you have to make educated guesses about what might happen, and what you can do now to protect yourself from it. Ideally, plan so that even if the bad things happen, you will be reasonably comfortable. The reason the article recommends a Roth 401k for those who have a long time until retirement is based on your salary, marginal tax rates, and effective tax rates and some assumptions. You want to contribute to Roth IRAs when your marginal tax rate now is better than your effective tax rate at the time of withdrawal.  That is most likely to be true when your salary is smaller (for you) and your salary is most likely to be smaller (compared to your future salaries) when you have more years until retirement. The article is presenting a rule of thumb.   It won't hold true for everyone in every situation. Something that's come up in comments and been alluded to in answers, but not explicit as far as I can tell: Even if your marginal tax rate now were equal to your marginal tax rate in retirement, or even lower, a traditional IRA may have advantages.  That's because it's your effective tax rate that matters on withdrawls. (Based on TY 2014, single person, but applies at higher numbers for other arrangements): You pay 0 taxes on the first $6200 of income, and then pay 10% on the next $9075, then 15% on $27825, then 25% on the total amount over that up to $89530, etc.  As such, even if your marginal rate is 25% (say you earn $80k), your effective rate is much less: for example, $80k income, you pay taxes on $73800.  That ends up being $14,600, for an effective rate in total of 17.9%. Let's say you had the same salary, $80k, from 20 to 65, and for 45 years saved up 10k a year, plus earned enough returns to pay you out $80k a year in retirement.  In a Roth, you pay 25% on all $10k.  In a traditional, you save that $2500 a year (because it comes off the top, the amount over $36900), and then pay 17.9% during retirement (your effective tax rate, because it's the amount in total that matters).   So for Roth you had 7500*(returns), while for Traditional the correct amount isn't 10k*(returns)*0.75, but 10k*(returns)*0.821.  You make the difference between .75 and .82 back even with the identical income.  [Of course, if your $10k would take you down a marginal bracket, then it also has an 'effective' tax rate of something between the two rates.] Thus, Roth makes sense if you expect your effective tax rate to be higher in retirement than it is now.  This is very possible, still, because for people like me with a mortgage, high property taxes, two kids, and student loans, my marginal tax rate is pretty low - even with a reasonably nice salary I still pay 15% on the stuff that's heading into my IRA.  (Sadly, my employer has only a traditional 401k, but they also contribute to it without requiring a match so I won't complain too much.)  Since I expect my eventual tax rate to be in that 18-20% at a minimum, I'd benefit from a Roth IRA right now. This matters more for people in the middle brackets - earning high 5 figure salaries as individuals or low 6 figure as a couple - because the big difference is relevant when a large percentage of your income is in the 15% and below brackets.  If you're earning $200k, then so much of your income is taxed at 28-33% it doesn't make nearly as much of a difference, and odds are you can play various tricks when you're retiring to avoid having as high of a tax rate. Your 401k IRA will now have three different sub-accounts, the one holding your Traditional (pre-tax) 401k contributions, the one holding your Roth 401k contributions, and the one holding the employer match contributions (which, as has been pointed out to you, cannot be considered to be Roth 401k contributions). That is, it is not true that So my next month's check shows $500+$500 going to the regular 401k, and $82+$82 going to the Roth 401k. Your next month's paystub will show $500 going into the regular 401k, $100 going into the Roth 401k, and if employer matching contributions are listed on the paystub, it will still show $600 going into the employer match. If you have chosen to invest your 401k in mutual funds (or stocks), shares are purchased when the 401k administrator receives the money and are also segregated in the three subaccounts. If you are paid monthly, then you will know on a month-by-month basis how many shares you hold in the three  separate subaccounts, and there is no end-of-year modification of how many shares were purchased with Roth 401k contributions versus how many were purchased with  pretax contributions or with employer matching funds as you seem to think. if you have a work-sponsored retirement plan  A 401k plan counts as a work-sponsored retirement plan. If you are a highly compensated employee (this is $115,000 for 2012), even your 401k contributions are limited.  Given that, is there any difference at all between having a traditional IRA and a normal, taxable (non-retirement) investment account?  You should consider a Roth IRA if you are making too much for a traditional IRA. When you make even more, then you can't contribute to a Roth, but can only contribute post-tax money to a traditional IRA.  Use Form 8606 to keep track of non-deductable contributions over the years. Publication 590 is the official IRS explanation of what is deductable or not.