@Critter-3 wrote:
Are you sure you can even convert the 401K to a ROTH 401K or did they just tell you of your option to make contributions to the ROTH 401K in addition to the regular 401K ? The second situation is common where the first is unusual.
@rcs4787
If you mean, "change over my contributions to the Roth option" (and not "convert my existing pretax assets to a Roth option") then here are my thoughts:
1. You obviously lose the tax deduction. Suppose you can afford to contribute $1000 per month pre-tax, that will actually reduce your take-home pay by around $750, so you could afford to contribute $750 to a Roth option for the same result to your monthly bottom line.
If we compare contributing $1000 pre-tax and paying income tax when you retire and withdraw, versus contributing $750 after tax and withdrawing it tax-free, the results are pretty similar as far as what you will have to spend in your retirement years.
1a. However, if you do end up at a lower tax bracket in retirement than you are in now, there is a slight financial advantage to making pre-tax contributions now. That depends partly on your expected income and partly on politics.
1b. You might want to consider the state you are living in now, and the state you plan to retire to, if you plan to move. If you are living in a high tax state and plan to move to a low tax state after you retire, that increases the financial advantage of keeping your contributions in the pre-tax account.
2. Having both pre-tax and after-tax retirement accounts gives you some additional flexibility when making withdrawals as to where to take the money from, that may be useful. For example, you might normally take your income from the pre-tax account and pay the taxes. Then if you need a lump sum for a new car or house renovation, you can take that from the Roth account and it won't raise your taxes on the rest of your income.
3. As before, Roth accounts do not have an RMD, so that represents additional flexibility when you retire.
I personally contribute to both pre-tax and Roth option accounts at my current workplace, I think having both is likely to be to my benefit in the long run. Which is best for you, again may require personalized professional advice.
