So should you pay taxes today by making Roth contributions to your plan? Or should you stick with pre-tax contributions, where you postpone paying taxes today but owe them in retirement? As always, it depends.

If you think your marginal tax rate will be lower in retirement, you may want to stick with pre-tax contributions. That way you’ll postpone paying taxes until you may be in a lower tax bracket.

If you think your marginal tax rate will be the same or higher in retirement, you may want to make Roth contributions. That way you’ll pay taxes at the current rate.

Of course, you don’t have a crystal ball to tell you what your marginal tax rate will be in retirement. It depends on so many things—your income, family status, retirement benefits, even government tax policy.

When a 401(k) plan includes a Roth feature, any participant eligible to make traditional deferrals can make Roth 401(k) deferrals.

Yes, you can contribute to both a designated Roth account and a traditional, pre-tax account in the same year in any proportion you choose. 

Yes, the combined amount contributed to all designated Roth accounts and traditional, pre-tax accounts in any one year for any individual is limited (under IRC Section 402(g)). The limit is $19,500 in 2020, plus an additional $6,500 if you are age 50 or older at the end of the year.

Because Roth 401(k) or 403(b) deferrals are made with after-tax dollars, they are never taxable at withdrawal. Their earnings can also be withdrawn tax-free when they’re part of a qualified distribution. To qualify for tax-free withdrawals, an employee must:

1. have had the Roth 401(k) or 403(b) account for at least five (5) years and
2. employee is age 59-1/2, or disabled or deceased.

When Roth 401(k) deferrals are withdrawn as part of a non-qualified distribution, their earnings are taxable at personal income tax rates and may be subject to a 10% early withdrawal penalty if the participant is under age 59 ½.