My son is 23 and is working full-time for what I consider to be a pretty decent salary. He's always been a bit of a saver, and he recently asked me if I thought he should contribute to his employer's 401(k) plan, or if he should instead save in a Roth IRA? What is your advice? A: Your son is wise to start saving at such a young age. For most of us, it's difficult to get into the habit of putting money away, so it's great if we can begin when we have our first "real" job. The question of whether to use a pre-tax savings plan, such as a 401(k), 403(b), 457 or a traditional IRA, or to use a Roth option, is not an easy one to answer. That's because there are so many variables that it's impossible to predict future outcomes. Your son's employer-sponsored retirement plan will provide him with a current tax deduction on whatever he contributes, up to a maximum of $18,000. The money invested within the plan will grow tax-deferred for decades, but when he reaches retirement age, everything he withdraws will be taxed as ordinary income, and at whatever the rate that ordinary income is being taxed at in the future. Introduction to Retirement FundsStart Now »View all Courses These tax-deductible retirement plans have been around for decades and have been endorsed by many experts based upon the premise that most people will find themselves in a lower tax bracket once they retire. With that in mind, it would seem to make sense to take that tax deduction today and defer paying the government its share until later.
