401k vs. Roth 401k

Now at a full time job I started at 10% and was planning on maxing out my contributions at 25% by the end of 2010, when I will be 26. The company I work for is also now offering a Roth 401k, but the company match is sill only in the traditional 401k.

Not sure if I should start a Roth 401k, which would reduce the amount I contribute to the traditional 401k, or just continue as I am for now. They are preaching tax diversification as a good reason to sign up for this. Currently I am in the 25% income tax braket, and when I retire I will most likely be in the 33% bracket.

If you are sure your tax bracket will be higher at retirement, then take the tax deduction now. Don't reduce the amount put into the traditional to invest in the roth feature. Invest in a Roth outside of the company 401k with your tax savings. That's diversification!

I really wonder if your tax bracket will be that high at retirement though. In any case, I'm all for saving taxes now. Perhaps there will also be some creative ways to avoid taxes when you retire. The tax code is pretty complicated now and it looks to get worse..... er better...... more complicated!

If you are sure your tax bracket will be higher at retirement, then take the tax deduction now.
I would have to respectfully disagree with this statement. Why would you want to defer a 25% price tag on taxes only to pay 33% later? That's like waiting to buy something when it costs 25% more. You are risking a 25% loss on your tax decision.

I would think the opposite to be true and a Roth would be a better choice.

i have to agree with pricespector...if you really do believe you will be in a higher tax bracket at retirement (i'm not sure how you "know" this, but i'll give you benefit of the doubt), take the tax hit NOW so you can be tax-FREE later. you will still have company-match dollars as pre-tax so you will in effect be tax-diversified. having said that, if you are eligible for a Roth IRA, you may want to just contribute to your 401k enough to get the match, then invest whatever is leftover into the Roth IRA.

Why would you want to defer a 25% price tag on taxes only to pay 33% later?

Not only the higher tax on your contributions, but 33% on any growth or earnings as opposed to 0% taxes on earnings with the Roth option.

I definately mis-spoke. Thanks for the correction.

At this person's age, and with the lower tax bracket, the Roth is a great option.

Sorry for reading too fast and answering too quick earlier. : )

Here's a tool you can use to calculate your net pay, under a Roth v. Traditional Scenario:
http://www.grubercompany.com/pages/freetools.asp

It's accurate to the penny in Ohio. Other states can override the (extremely high) Ohio tax rate(s).

I have a client who wants to negotiate an employee's next raise based on net rather than gross. This tool helps them run scenarios and get instant feedback.

Last year we created a tool to help document the difference between a Roth and a Traditional 401k, given a certain set of circumstances. It was recently added to our list of free online tools, so feel free to take a look at it at your leisure.
http://www.grubercompany.com/pages/rothvtraditional.asp

Bottom line; you need a crystal ball to help you decide what your marginal tax rate will be at retirement.

Hope this helps.