Most retirement plan participants have the option of making regular pre-tax 401(k) contributions or Roth 401(k) after-tax contributions. Roth 401(k) contributions (along with all accumulated earnings) can be withdrawn tax-free if distributed due to a qualifying event from an account that has been in existence for at least five years. Regular, pre-tax 401(k) contributions (and the associated earnings) are taxable when removed from a qualified retirement plan.
A rule of thumb: If you believe tax rates will be higher in the future, it makes sense to make more Roth 401(k) contributions now rather than regular 401(k). The logic is that it is better to have your contributions taxed at a lower rate now as opposed to a higher rate in the future (since regular 401(k) contributions aren’t taxed until withdrawn).
