Employee retirement contribution plans such as 401(k), 403(b), and 457 have been in use for over 40 years and have become the predominant retirement savings vehicles for U.S. employees. The name of each plan refers to the section within the federal tax code for the Internal Revenue Service (IRS) that sets the laws of administration. With many employers providing such plans and offering matching contributions to their employees, employees should prioritize taking advantage of these plans and funding such matching plans when saving for retirement.
With the introduction of Roth employer plans in 2006, this added option has created confusion for many employees as they wonder which account (Traditional or Roth) is best for their situation. It is not necessarily an either-or decision. Further, regardless of how employees direct their contributions, any contributions made by the employer will be directed to a Traditional account. Both Traditional and Roth accounts have merit and are viable savings vehicles for retirement.
The right course will come down to the employee’s individual situation and will be influenced by current cash flow needs, current income tax rates, and the employee’s projected income tax rate during retirement. Generally speaking, Traditional accounts are a preferred option for those looking to reduce current income tax burdens. Roth accounts tend to be more favorable to employees wanting greater financial flexibility in retirement and those who are concerned with reducing retirement tax burdens.