OctaveWealth allows you to make both Traditional 401(k) or Roth 401(k) contributions to your account. There are a few things you should consider when deciding which contribution to make.
What are Traditional 401(k) contributions?
Traditional 401(k) contributions are made with pre-tax dollars and decreases your current taxable income. You will pay taxes on the contributions and earnings at the tax bracket you’re in when you withdraw.
What are Roth 401(k) contributions?
Roth 401(k) contributions are made with after-tax dollars and you pay taxes before making the contribution. You won’t pay taxes on the contributions and earnings if you withdraw at age 59.5 or older.
What type of 401(k) contribution should I make?
When deciding which contribution to make, you should think about if your tax bracket now is higher or lower than what it will be in retirement. Because you can’t know the answer right now, many people contribute both Traditional 401(k) and Roth 401(k) to have more options at retirement.
Importantly, employer contributions are always made as Traditional (pre-tax) contributions—something that might factor into your choice.