Basic 401k vs roth 401k

[HiJumpKick (HJK)]

Hi all,

I am 23, just started my FT job after graduating, woohoo!  I was informed about the 401k options that I can contribute and found out about basic and roth 401k's.  I did research and conclude that i like both benefits they bring so I have decided to contribute to both, half and half.  Is there a disadvantage to my decision?

[Abe]

I don't think so, a fair number of people divide it in this manner to hedge against fluctuations in tax rates in the future and to have access to principal from the Roth 401k if needed. 

[matchewed]

To base your decision on what you like is probably a poor criteria. Figure out what is advantageous to you given your plan and goals. Which accounts will support your future endeavors? How do you utilize them as tools for that? In the meantime I'd use a traditional 401k until I educated myself, tax deferment is a good money saving tool.

[Baron235]

What's your tax rate?  What will it be when you retire? 

It really depends on your tax bracket to know which is best. 

[GlassStash]

To base your decision on what you like is probably a poor criteria. Figure out what is advantageous to you given your plan and goals. Which accounts will support your future endeavors? How do you utilize them as tools for that? In the meantime I'd use a traditional 401k until I educated myself, tax deferment is a good money saving tool.

This all the way. Take an accounting of your entire situation and see how the prospective advantages/disadvantages of each type of 401k works into your goals. For starters, you didn't mention your current and/or prospective marginal tax rates.

[HiJumpKick (HJK)]

Thank you for the responses.  My tax rate is about 12% and i actually think i may be in a higher bracket by the time I retire (still estimating the moment).

[GlassStash]

Thank you for the responses.  My tax rate is about 12% and i actually think i may be in a higher bracket by the time I retire (still estimating the moment).

Assuming this means your marginal tax rate is currently 15% and you plan to retire with a marginal tax rate of 25% (a pretty high retirement spending/income figure), the Roth 401k might be the best bet. You would be locking in that low 15% tax rate now, along with the benefit of withdrawing contributions if necessary. As your income and tax rates begin to increase in your career, it will be prudent to re-valuate whether the Roth or Basic 401k is best.