Everyone has heard of a 401(k) and knows how it can help you in retirement. The money in a traditional 401(k) is deposited pre-tax, leaving you to pay taxes upon withdrawal. That leaves you at the mercy of politicians in the sense that you have no idea what taxes will be when you retire. A more controllable option is a Roth 401(k).
There are several advantages to a Roth 401(k). The deposits are all made after taxes have been withheld, lowering your retirement tax burden. With a traditional 401(k) you must begin taking distributions when you turn 70½ (or if later, the year you retire), but with a Roth 401(k), there is no required minimum distribution (if you roll the Roth 401(k) into a Roth IRA). When you take distributions from a traditional 401(k) you could be bumped into a higher tax bracket, reducing your Social Security benefit and increasing your Medicare costs. How is that? With a married couple filing a joint tax return in 2012, up to 50% of their Social Security benefit is taxed if the sum of their adjusted gross income and half of their Social Security payout along with any nontaxable interest income is between $32,000 and $44,000. If their adjusted gross income is more than $44,000, up to 85% of their Social Security is taxable.
Additional aspects of a Roth 401(k) are that you withdraw your money tax-free once the account is five years old and you are 59½ years old. If you leave your job at age 55 or later, you can take distributions without penalty, assuming the account is at least five years old. Also, there is no option to convert a Roth to a traditional 401(k). You would have to stop contributions and open the traditional 401(k). You would then have two 401(k) plans to manage.