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Which is Better for Me – a Roth or Regular 401(k)?

Some 401(k)s give participants the ability to make after-tax contributions, which raises the question of which fits better into a person’s retirement plan.

One advantage to Roth 401(k)s is that they do not have income limits which may have barred certain high earners from contributing to a Roth IRA in the past. Down the road in retirement, it may be advantageous for someone with significant savings to be able to take some withdrawals that do not increase his or her income tax bracket.

In most cases, this will not be an all-or-none decision, and when people have these two options, they are likely to take advantage of both if they are educating themselves, even though the immediate benefit of reducing income taxes will bias most people strongly in favor of traditional pretax 401(k) contributions. This last psychological phenomenon is known in behavioral economics as hyperbolic discounting or present-bias.

Since it is very difficult to be self-aware and objective enough to keep such cognitive biases in check, it might be prudent to seek advice from a professional financial consultant that can help you determine which retirement account will most benefit you now, and, more importantly, in the future.

Keywords: taxation, retirement accounts, behavioral economics, present bias, hyperbolic discounting,