Q: My company offers a Roth- 401(k) where I can contribute almost $20K per year. I can contribute even when my income is over the limits to do one on my own. My wife and I are in the 33 percent federal tax bracket. We live in Minnesota, so our state income tax rate is high also. Would you recommend for me to contribute to this and pay the tax on that income now or take the tax break now and pay the tax down the road?

Neil

A: I like the Roth-401(k) option. Taxes are the key difference between a traditional 401(k) and a Roth-401(k).

As you mention, contributions into the Roth-401(k) are made with after-tax dollars. The earnings on your investments are tax free at withdrawal in your retirement years. A wrinkle is that if there is an employer match it's made with pretax dollars into a segregated account. The match will be taxed at withdrawal.

From a tax perspective the Roth is a smart choice if you think that your tax rate will essentially stay the same (or even go higher) when you start withdrawing money. An additional advantage in retirement is if you face a big bill, say, for an unexpected medical procedure or a bucket-list trip, you can pay the tab with the Roth without incurring a tax bill.

Contributions into a regular 401(k) are made with pretax dollars. You will pay your ordinary income tax rate on the savings when it's taken out. If you were confident that you will be in a lower tax bracket in retirement than you are now, from a tax perspective it makes financial sense to fund a traditional 401(k).

In other words, taxes are the key consideration. A major reason for most people to consider the Roth-401(k) option is the combination of tax uncertainty and tax diversification. (The same holds for the Roth IRA, but I'll stick with 401(k)s.)

First, no one really knows what tax rates will be in the future. What's more, you might stay employed into the traditional retirement years or you might say goodbye to colleagues for the last time and never earn an income again.

With that in mind, tax diversification pays. I imagine you have traditional 401(k)s or 403(b)s (or maybe IRAs) from earlier jobs before the Roth-401(k) became an option. The combination of traditional pretax retirement savings accounts and Roth retirement savings accounts gives you flexibility to be tax smart when you start withdrawing money. Depending on your circumstances, sometimes the savvy move will be to tap into the traditional 401(k) and at others to withdraw from the Roth-401(k).

Chris Farrell is senior economics contributor, "Marketplace," commentator, Minnesota Public Radio.