IT'S YOUR MONEY: Mix of Roth, tradition 401(k) may be best retirement

Jane Young for gazette.com writes: Many large employers have started offering employees a choice between a traditional 401(k) and a Roth 401(k).

The primary difference between them is when you pay income taxes. When you contribute to a traditional 401(k), your contribution is tax deductible, but you must pay regular income taxes on distributions taken in retirement. Contributions to a Roth 401(k) are not deductible, but you pay no income taxes on distributions in retirement.

As with your traditional 401(k), your employer can match your Roth 401(k) contributions, but the match must go into a pre-tax account.

There are other differences between the two. In 2014, annual contributions to a Roth IRA are limited to $5,500 plus a $1,000 catch-up contribution if you are 50 or older. It's higher for a Roth 401(k): $17,500, plus a $5,500 catch-up contribution.

There also are income limitations on your ability to contribute to a Roth IRA, but none on a Roth 401(k). According to the IRS, the 2014 Adjusted Gross Income phase-outs for Roth IRA contributions are $181,000 to $191,000 if you are married filing jointly, and $114,000 to $129,000 if you file single. The phase-out if you are married filing separate is between zero and $10,000. (If you earn too much to contribute to a Roth IRA, you can open a nondeductible IRA and convert it to a Roth IRA.)

Another difference? Upon reaching 70 ?, you are required to take a minimum distribution from a Roth 401(k). You don't have to with a Roth IRA. However, you can transfer your Roth 401(k) to a Roth IRA before 70 ? to avoid this requirement.

The decision on whether to invest in a Roth or traditional 401(k) depends primarily on when you want to pay taxes. If you are in a low tax bracket now and think you will be in a higher bracket in retirement, a Roth account may be your best option. But if you're in a high tax bracket now and think you may be in a lower one in retirement, you might want a traditional 401(k).

A Roth 401(k) is generally most appropriate for younger investors just getting started in their careers or someone who is having a low-income year. People in their prime earning years may be better off taking the current tax deduction available with a traditional 401(k).

Unfortunately, it's difficult to know where our tax bracket will be in retirement. It is also hard to know if tax rates will increase before we hit retirement, though some people believe they'll rise to help cover the federal debt. Amid this uncertainty, your best option may be to split your contribution between a Roth and traditional 401(k). This will give you some tax relief today and some tax diversification in retirement.