On this episode of Ready for Retirement, James answers the question “Should I do a Roth or Traditional 401k?” James addresses this question by discussing, with practical examples and numbers, when it makes sense to use a Roth 401k, or IRA, and when it’s a better option to use a Traditional 401k, or IRA. 

The general difference between the two is when you pay taxes, and whether your contribution is part of your taxable income. However, there are benefits to both options. With Roth accounts, you don’t have to worry about your tax brackets during retirement, since you’ve already paid taxes on that money. 

Additionally, income from Roth accounts is not considered part of your provisional income, and therefore will not impact your Medicare costs or push you into a higher tax bracket. Finally, there is no required minimum distributions, so you are not required to take any income you don’t want or need. In regard to Traditional investment accounts, you are able to save money in the present, as the money you invest is not taxed when you invest it, but later, when you withdraw the money. 

Therefore, you have less taxable income now. This can be very beneficial if you’re in a higher tax bracket. With Traditional accounts, however, there are required minimum distributions, which means that you may be required to take income you don’t want or need, as well as be pushed into a higher tax bracket during retirement.

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