More employers are offering Roth 401k option to complement their existing traditional 401k, so which do you choose?
The Roth 401k works identical to a Roth IRA in that you don't get a tax deduction for contributions but all future growth is tax free. However, there are a couple of very big differences in the two, because the Roth 401 operates exactly like a traditional 401k it means you can put up to the annual IRS limit into the plan, for 2013 that is $17,500 (vs. $5500 for Roth IRA). It also means that there is no income cap on contributions.
With a Roth IRA you are unable to participate if your household AGI exceeds $178,000 joint or $112,000 single (beginning of phase out for participation). With a Roth 401k this income cap does not apply.
So which to choose Roth 401k or Traditional 401k? Everyone is unique in their needs but a rule of thumb would be if you have enough free cashflow each month so that your not hurting with the excess taxes withheld from your paycheck, then go for the Roth 401k. In the long run you will thank yourself.
One note: more companies are also allowing a Roth 401k conversion from a traditional 401k. Just like converting a traditional IRA to a Roth IRA, it is beneficial if you have time to allow the money to compound AND you have excess saving on the side to cover the tax bill when it comes due. Any conversion is booked as ordinary income, so plan in advance as it may bump you into a higher tax bracket when you convert.