To Roth or Not to Roth

That is the question.


When it comes to retirement investing, you have a lot more options than your parents did. Of course, you probably don't have a pension, but you do have plenty of choices: the 401(k), the IRA, its cousin, the Roth IRA, and even the Roth 401(k) in some cases. But how to decide which one? Let's start with the basics (assuming you already know how a 401(k) works):

Traditional IRA: When you put money into a plain-vanilla IRA (that stands for Individual Retirement Account) your contributions are not taxed. They grow tax-free until retirement, when they're taxed as income at the time of withdrawal.

Roth IRA: You pay income tax on the amount you contribute now, then take tax-free withdrawals in retirement. Think of yourself as a farmer, says Christian Cordoba, wealth advisor and principal at California Retirement Advisers in El Segundo, Calif.: "It's like paying tax on a seed and getting the harvest for free."

Roth 401(k): This is a hybrid between a Roth IRA and a traditional 401(k). One difference is that the contribution limit to a Roth 401(k) is higher than a Roth IRA. Another is that you can receive matching contributions from your company in a Roth 401(k). And in a Roth 401(k), you only get to choose from among your employer's menu of investment choices.

Whether you go with team 401(k) and traditional IRA or team Roth IRA and Roth 401(k) is a big decision. Some might call it a gamble: You need to weigh your current tax rate against what you think your tax rate will be in the future. So if you expect that you'll be in a higher tax bracket when you reach retirement, Roth is a good bet. But if you are making a ton of money now--and think your salary will likely be lower in retirement--you might want to delay taxes and stick with a traditional 401(k) or IRA.

It's not an either-or decision, though. Consider hedging your bets by contributing to both, says Cordoba. "Say you're putting $5,000 a year into a 401(k)--be sure to get the employer match--then it might be prudent to put another $5,000 into a Roth IRA so you have half of your money tax-free, and on the second half, you pay tax."