Consider your expected tax bracket in retirement. If you anticipate a higher tax bracket in retirement than you have now, a Roth 401(k) is generally preferable. Contributions are made after tax, but withdrawals in retirement are tax-free.
Conversely, if you expect a lower tax bracket in retirement, a traditional 401(k) might be a better fit. Contributions are tax-deductible now, resulting in lower current taxes, but withdrawals are taxed in retirement.
Tax Implications at a Glance
| Contributions | After-tax | Pre-tax |
| Withdrawals in Retirement | Tax-free | Taxed as ordinary income |
| Tax Diversification | Reduces reliance on future tax rates | Relies heavily on future tax rates |
Additional Factors
Your age also plays a role. Younger employees with longer time horizons may benefit more from the tax-free growth offered by a Roth 401(k). Conversely, older employees closer to retirement might find a traditional 401(k)’s immediate tax benefits more advantageous.
Finally, review Exelon’s specific plan documents for details on contribution limits, vesting schedules, and any other relevant rules. Consult a financial advisor for personalized guidance based on your unique circumstances.
