Roth 401k vs. 401k vs. Other: No Decision Yet

by Kevin on August 5, 2008

Stop!
(Photo by greg westfall)

When I wrote about possibly stopping my 401k contributions last week, I got several very detailed responses that compared Roth 401k vs. Traditional 401k plans. That was never my intention — but I’m happy to have the discussion going on here.

I didn’t intend for the discussion to be should I switch from my current Roth 401k to the traditional option. I meant to compare the idea of stopping my Roth 401k contributions and using the money in other ways towards our savings goals.

I originally switched over to the Roth 401k option when it first came out with my company. Why? Well, I love the Roth IRA and figured it would be very similar. Pay taxes now, and never pay them again. But several users, including Living Almost Large, left several comments talking about the benefits of a 401k over a Roth 401k. So now I’m considering that as well.

My Options

  • Keep everything the same. Don’t make any changes, and keep using the Roth 401k option.
  • Switch back to the traditional 401k option. Enjoy the tax break and get some tax diversification to boot.
  • Stop all 401k contributions for the rest of the year. Use the extra money toward our other savings goals.

If you have any additional ideas, suggestions, or comments on the above three options please leave them in a comment! I’m always interested to get different opinions. I’m still thinking about it this week — taking my time and not making any rash decisions.

{ 1 comment }

Debbie M August 8, 2008 at 10:06 am

I like your option 1; it sounds okay, like you have acceptable choices for investing.

And I sort of like option 3, only it doesn’t seem like you have a problem with saving for retirement, just with this plan. So you could use other vehicles for saving for retirement.

*Roth IRA (if you qualify)
*Just ordinary investments. It’s sort of like a Roth in that you pay taxes now. In the future you will pay taxes only on your dividends and capital gains. I sort of like the idea of paying taxes as I go because I think tax rates are going nowhere but up in the future.
*A combination: Use for 401K for things that are taxed like income (bonds interest?) and regular investing for things that are taxed at a lower rate (stocks with dividends and capital gains).

Later, if you get a better plan and you can’t afford to make the most of it, you can move some of these savings in ordinary investments into your new plan.

Also, please note that once you leave this job, you can roll your mediocre Roth 401K investments into a Roth IRA and pick the investments you like. If you don’t plan to work here indefinitely, this is probably the best plan.

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