Now a days employers are offering Roth 401K in addition to the tradition 401K and more and more growing number of people are faced with the dilemma of which one to choose.

Well, first let me tell you the difference -

• Funding - Traditional 401K is funded by pre-tax dollars. Roth 401K is funded by after tax dollars.
• Tax - Traditional 401K grows tax free but the tax is levied on the amount taken out during retirement based on the current tax bracket.
  Roth 401K also grows tax free but there is NO tax at the time of taking money out during retirement.

Number wise if your tax bracket is expected to be the same then 401K and Roth 401K are the same. But why would someone introduce another product to get the same result?

Here is the catch - if you think that you would be in a higher tax bracket because of some business you are planning to open or some venture you are planning to take or you would not plan to retire at 59.5 age and get quite high salary then you should go with Roth 401K. It's because you would be paying less taxes when you take out the money.

But if you think that you would be in a lower tax bracket because of not so high income during your retirement then you would be fine with tradition 401K.

Another catch is that in both traditional 401K and Roth 401K you are allowed to contribute the same maximum amount annually but you may end up saving more in Roth 401K. How?

Let's see. Traditional 401K contribution limit and Roth 401k contribution limit are as follows:

• $15,500 for those under 50 years of age
• $15,500 and additional $5000 catchup for those over 50 years of age

Now, if you fund your traditional 401K then using pre-tax dollars you can save up to $15,500 in year 2008. When you take out the money during retirement you will pay tax.

If you fund your Roth 401K then you will fund with after-tax dollars and you can save utp $15,500 in the year 2008. But you DO NOT have to pay any tax during your retirement.

Consider 8% annual rate of return compounded annually on the initial investment of $15,500 and you invested in only the year 2008.

In Traditional 401K you will have around $155,971. But when you withdraw money you will have to pay taxes. Considering 30% tax bracket you end up having only $109,179.

In ROth 401K you will have around $155,971. But you DO NOT have to pay any tax and you end up having $46,792 more.

How did this happen? I call it "Phantom Savings" as you don't see it but it's happening. Since you are putting after tax money in Roth 401K you are saving more in your retirement plan and your take home money is less. The difference in the take home money is going toward your retirement plan which will never be taxed in Roth 401K.

Here is my advice in a nutshell:

• Go for Roth 401K if you think that you will be in a higher tax bracket during your retirement
• Go for Roth 401K if you have more money to save and you can easily digest the difference in the take home amount between tradition and roth 401K.

I have my money put in Traditional 401K. The day I think that I would be in a higher tax bracket (which might happen pretty soon) I would start putting in Roth 401K.

Caveat: Not all companies offer Roth 401K so rolling over your old Roth 401K to your new employer might not work. Please consult your tax adviser if you are in that boat.