masikafinance

Taxes affect your 401k or 403b significantly. Whether you have Roth or traditional 401k, taxes still affect your investment but differently.

Taxes affect Roth when you get paid. In other words, every time you get a check from your employer weekly, bi-weekly or monthly, taxes are taken right away before your money is invested. This action of taxes being taken away before the funds are invested ensures that by the time you retire, you will not pay any taxes as you have already paid. At retirement, you just withdraw money and no worries about taxes.

Taxes also affect the traditional 401K/403b. Taxes are not taken out of your paychecks. This reduces your taxes now and therefore your taxable income is reduced. Your investment grows tax free. However, at retirement, you will pay taxes.

Whether Roth or traditional 401k works for you, it depends on your financial planning. Roth is better for you if you expect your income to be higher at the retirement age. This is because higher income means higher tax bracket, and Roth is ideal for this because you will not pay taxes. For example, high skilled jobs like doctors, Roth is a better option.

Traditional 401k is ideal for those that expect to be in a lower tax bracket as they are going to pay taxes which is ideal for low skilled jobs.

Some people, mix Roth and traditional 401k at 50 percent each. This is brilliant because they reap reduced tax benefit from traditional and at the same time benefit from no taxes on the other 50 percent Roth.