Traditional vs. Roth

Traditional pre-tax contributions lower your taxable income. You avoid paying taxes on your contributions, but when you withdraw those funds for retirement, you will owe ordinary income taxes on those contributions and any earnings.

Roth contributions don’t lower your taxable income, so you pay taxes before the funds are contributed to your account. You can then make tax-free withdrawals of your contributions and any earnings provided you are at least age 59½ and made your first Roth contribution at least five years earlier.

Which Type of Contribution Might Be Right For You?

Might Benefit from Roth Contributions

Who	Why
You're financially prepared for retirement (high savings, good benefits)	Chances are you’ll be in the same or higher tax bracket in retirement. Any Roth savings would be exempt from taxation.
You contribute the maximum allowed amount to your plan	Switching to Roth contributions increases your tax-advantaged saving.
Your income prevents you from contributing to a Roth IRA	You can enjoy the advantages of a Roth IRA within your employer sponsored plan, which has no income restrictions comparable to those of the Roth IRA.
You don’t earn a lot today, but your career is just getting started.	You expect your income, and tax rate, to rise in the years to come.
You pay taxes at a low rate today (10% or 15%)	Making Roth contributions would cost you little today and could result in tax savings in retirement.

Might Not Benefit from Roth Contributions

Who	Why
You’re behind on saving and expect Social Security to be the mainstay of your retirement	Chances are your income will decrease in retirement. Consequently, you’ll be in a lower tax bracket.
Your pay spikes thanks to big commissions or bonuses.	Your tax rate may be higher this year than in retirement. So you may be better off deferring taxes now with pre-tax contributions and paying at a lower rate later.
You have children, a family income generally between $20,000 and $50,000, and receive the earned income tax credit or the additional child tax credit.	Switching to Roth contributions would raise your taxable income and could cost you these valuable tax credits. These credits are more valuable than the Roth would be to you.

Withdrawals made before age 59½ may be subject to a 10% federal penalty tax. Earnings withdrawn before age 59½ or before the five-year holding period may be subject to income tax and a 10% federal penalty tax.