Roth 401(k) for Women

Walter Updegrave at CNN Money takes a question from reader Danny about whether a traditional, pre-tax 401(k) or a Roth 401(k) is better for him. Updegrave's answer points out that, assuming your tax rate is the same at the time of contribution as it is at the time of withdrawal, you will come out even at the time of withdrawal if you size your contribution to take the same bite out of your after-tax paycheck. For example, you could max out your pre-tax 401(k) with $15,500 this year, or contribute $11,625 to a Roth 401(k) after taxes (at a 25% rate), and you would still end up with the same takehome pay either way. However, Roth 401(k)'s have the same contribution limit as pre-tax 401(k)'s, so if you can afford to reduce your takehome pay by a little bit now, you could ramp up your contributions to your Roth 401(k) and effectively increase the amount you have in tax-advantaged accounts beyond what you could have if you'd stuck with the pre-tax 401(k).

There are other factors to consider, too. Aren't there always? The two biggies are: What is your current tax rate? And what does your crystal ball tell you your tax rate will be when you retire, based on projected job changes, nest egg savings, or changes in the tax law? (Aside to my fellow twenty-somethings: if you get a read on what tax code changes we might expect over the next 9+ presidential elections and 18+ congressional elections that stand between us and retirement, please do let me know. And let me know what numbers I should buy in Powerball. kthnxby). If your tax rate now is higher than it will be in retirement, a Roth 401(k) may well be a losing proposition. However, my money's on the Roth 401(k) even though I'm in a high tax bracket now because federal tax rates are at historic lows and I'm hoping that by the time I retire, I'll have saved up enough that I can replace most of my salary. Besides, I like the relative peace of mind that comes with knowing the money I have invested for retirement is mine, all mine, and isn't quite so subject to the vagaries of changing tax laws.

So what does this have to do with women in particular? As we all know by now--I hope--we need to be saving more money for retirement than men do, but by all appearances we are saving less. This is not good. This needs addressing. All other things being equal, maxing out a Roth 401(k) yields more usable retirement savings than maxing out a pre-tax 401(k) does. If you can't quite find the coin to max out a Roth 401(k), anything over the amount you get multiplying $15,500 by your current tax rate and you'll come out ahead (again, assuming your tax rate in retirement is the same as or higher than it is now, as I am betting on for myself). If you have a Roth 401(k) option through your employer, and can stomache a reduction in your takehome pay now--even just a small amount can make a huge difference in time!--switching from a pre-tax 401(k) to a Roth 401(k) is one way to help to make up some of the savings gap you'll need to fill. You long-lived, forward thinking lioness, you.