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鈥淚nvest your money now, and never pay taxes on your earnings.鈥� Sounds pretty tempting, doesn鈥檛 it? But if you contribute just enough to get your employer match, and you can鈥檛 set aside any more, you might want to think twice before signing up for a Roth 401(k).

When looking into retirement planning, you鈥檝e probably heard many times that you must contribute enough to get the full employer match when it comes to your 401(k). That鈥檚 because if you don鈥檛 contribute enough to get the match, you are leaving money on the table. But let鈥檚 face it, sometimes money is tight, and you might not be able to contribute enough to get the match. And other times scraping together enough to get the full match is all you can do. You might want to do some math before you commit to a Roth 401(k), since the employer match goes into a tax-deferred account.

A Roth 401(k) allows you to contribute after-tax dollars to your 401(k), and never pay taxes on the contributions or the earnings. This can be a powerful incentive to contribute to a Roth 401(k), but first, let鈥檚 take a look at a few scenarios.

Let鈥檚 say you have $1,000 in earnings that you can contribute to your 401(k). You can pay taxes on the $1,000 and contribute the rest to a Roth 401(k), or you can contribute the full $1,000 to a 401(k). Since you don鈥檛 have to pay taxes on the contribution, $1,000 is below the matching threshold, so your employer will match the contribution dollar for dollar. For the first scenario, we鈥檒l assume that your marginal tax rate in retirement is the same as it is now at 25%. We鈥檒l also assume that over time, the amount in the account quadruples. Let鈥檚 do the math and see what happens:

In this example, you will have more money in your pocket if you skip the Roth 401(k).

What if tax rates go down? Let鈥檚 assume you move from the 25% marginal tax bracket while working to the 15% tax bracket in retirement. Time for more math:

Again, skipping the Roth will put more money in your pocket, and the difference also is more than if your tax bracket stays the same. But most people pick the Roth because they think their taxes will be higher in retirement.听 In this case, we鈥檒l assume that taxes in retirement increase to the next-highest bracket 28%. More math:听

听The Roth 401(k) still means you鈥檒l have less money in your pocket. It鈥檚 true even if your marginal tax rate increases to the highest current marginal rate 39.6%:

听Of course, there are exceptions to the rule:

• If you are in the 15% tax bracket, there will be a higher tax bracket at retirement where a Roth 401(k) could put more money in your pocket than the traditional 401(k).
• If Social Security and your 401(k) will be your only sources of income in retirement, using a Roth 401(k) might keep your income low enough to avoid taxes on your Social Security. But even though that could make it worth contributing to a Roth 410(k), this depends on the size of your 401(k).
• As your contributions exceed the matching threshold, the advantage shifts to the Roth 401(k) as the non-taxable distribution increases.

The bottom line, like always, we don鈥檛 want to let the tax tail wag the dog. Take a look at what will put the most money in your pocket. That said, if you contribute just enough for your employer match and blindly put your money into a Roth 401(k) without thinking through the outcome, or if you don鈥檛 hire a financial or tax advisor to do the thinking for you, you could be your own worst enemy.

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