Traditional 401K Or Roth 401K? Our Decision And Why.

Here’s an article that explains the difference and the benefits of either Traditional/Roth 401k:

We recently signed up for a 401k at my husband’s work. To my surprise we had an option to choose to sign up for a traditional 401k or a Roth 401k. I heard of Roth 401k before but was never offered it from my past jobs though I do have a traditional 401k (from past job). Even more surprising is that his employer will match 50% up to a certain % of his salary. We had to think about what will benefit us in the long run.

Choosing Traditional 401k

-Contributions won’t be too hard of a hit on this budget we somewhat follow.

-We will be taxed when it is ready to be cashed out which is 59 1/2 in the contract.

Choosing Roth 401k

-Since contributions will be after taxes, it will be a harder hit on our budget now as opposed to the traditional method.

-No taxes when it is ready to be cashed out.

In the end we decided to go with a Roth 401k. I thought about it in terms of how we will be living say 30 (or 40) years from now. Many articles/financial advisors claim that a Roth 401k is beneficial for someone who is planning to retire with a higher standard of living. Because you already paid taxes on that income. The real question for us as a couple is will we really have a higher standard of living compared to now?

My husband and I would like to retire with a house paid off, very little or no car payments (we do this now), and hopefully both of us in good health. I’m just basing this off the biggest bills most people have even when they retire. Will we really be spending more than what we are spending now? I thought most seniors who retire live off less money. If we didn’t have a mortgage to worry about,then our standard of living will be considerably lower. We are not car lovers and we base our car purchases on the affordability/longevity of the car instead of how cool they look in traffic. Even in 30 years I can’t see even him wanting to buy a sports car( though I do see him wanted to spend serious cash on a humidor room for his cigars).

I can’t predict how we will live during retirement. What happens if something health wise goes wrong to either of us? I work/volunteer with seniors often and it’s not uncommon for them or their spouses to have something with their health. Even though their standard of living is generally lower, their medical bills are definitely higher. At my last job my co-worker was retirement age but he had to keep on working for his wife for the health insurance. If he didn’t, her medical bills would wipe out their life savings for sure (she wasn’t qualified for medicare yet).

We realized we are probably going to have the same/or higher standard of living when we retire. Right now we are in the stages in our life where we are happy with the way we are living (aside from not saving as much as we want) and really don’t intend to keep up with the Joneses. At least now we are saving for retirement. It’s better to start somewhere than no where right? What did you sign up for?



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