People frequently ask, should I contribute to my Traditional 401(k) or Roth 401(k)?

Unfortunately, the answer is not so black and white. I am going to go over the basic mechanics, advantages, and limitations of both of these tax advantaged retirement accounts.

A major advantage of a Traditional 401(k) is that you contribute pre-tax dollars and get a tax deduction reducing your current income tax liability. Contributions grow tax deferred and once they are distributed, they will be taxed at ordinary income tax rates.
Unless you meet an exception, distributions prior to age 59½ will incur a 10% penalty. You must take Required Minimum Distributions the year following the later of turning age 70½ or when you retire. If you are a more than 5% owner, RMDs must start at age 70½.

With a Roth 401(k), you contribute after-tax dollars and do not get a tax deduction; however, qualified distributions are taken free of tax, therefore, you never pay taxes on earnings. This strategy may be beneficial if you expect to be in a higher tax bracket later in life and is an effective tool to transfer funds fee of tax to the next generation.

For a distribution to be considered qualified, you must be over age 59½ and have been contributing to the plan for a minimum of 5 years. Nonqualified distributions will also incur a 10% penalty but are only taxed to the extent of earnings in the account because taxes have already been paid on contributions.
Unlike a Roth IRA, you must take Required Minimum Distributions from your Roth 401(k).

Clearly, there is no universal answer as it depends on your Adjusted Gross Income, current tax deduction needs, and current and future tax brackets. We encourage you to consult a financial advisor or tax professional about your individual situation.