Easier access to Roth advantages
Investing in a 401(k) plan allows you to delay paying taxes to Uncle Sam for decades while your money grows.
But that big plus also comes with a drawback. Until you finally pay the tax, "the government still owns a portion of the investment," Tharp says.
Putting the money into a traditional IRA creates a similar dilemma. But choosing a Roth IRA allows you to pay the tax up front and then enjoy tax-free growth now and untaxed withdrawals later.
"Tax deferral is a nice benefit, but it is nowhere near the benefit of tax-free growth," Tharp says.
Some employers now offer a Roth 401(k) plan that mimics the benefits of a Roth IRA. However, such plans have not been universally adopted. For example, a Vanguard study found the Roth option was offered by 49 percent of the 401(k) plans for which it serves as the custodian.
Itzoe says a Roth makes the most sense for investors who expect their tax rate to be higher in retirement. However, it is hard to forecast that in advance.
"I wish I had a crystal ball and could tell you what tax rates will be in the future," he says.
Because of this uncertainty, he recommends splitting funds between tax-deferred and Roth accounts.