People frequently ask me if they should use contribute to their ‘regular’ IRA or their Roth IRA. I’m usually wishy-washy in my answer because it depends on a variety of factors, including things that are simply unknowable.

Before getting into whether you should or shouldn’t consider the Roth option, let’s review the basics.

A ‘regular’ 401k (as people often refer to it when talking to me), is the traditional savings plan that allows investors to contribute pre-tax money to a plan where the assets grow without ongoing taxes but are subject to taxation upon retirement. Since the money is taxed upon withdrawal, we refer to money in this plan as ‘tax-deferred.’

In recent years, a lot of plans have adopted a Roth option, which allows investors to contribute money after-tax, meaning that there is no tax deduction today, unlike a traditional 401k. Like the traditional 401k, the money grows without taxes each year, but unlike a traditional 401k, the money is withdrawn without taxation. As a result, we think of Roth 401k contributions as tax-free.

The basic question becomes whether you want to avoid some taxes today and pay them later, or pay them today and avoid them later.

The first question, therefore, is whether you think your future tax rate will be higher than your current tax rate. This is one of those questions where the answer is unknowable. Most people reasonably assume that their tax rate will be lower in retirement than in their working years, but that isn’t always the case.

And with federal and state deficits as they are, and are expected to be, it’s reasonable to assume that tax rates will change in the future, but who knows when, and by how much?

If you are confident that your tax rates will lower in the future than they are today, consider making a traditional contribution. You will get the tax deduction now (a bird in the hand), and your distributions in the future will be taxed at a lower rate.

The next question is whether you are eligible to contribute to a Roth IRA, which has the same basic structure as the Roth 401k option, but isn’t available to everyone since there are limits based on income ($140,000 for individuals and $208,000 for married filing jointly). If you can’t do a Roth IRA because of your income, consider the Roth 401k.

If you are eligible for the Roth IRA, ask yourself whether you think you’ll need to withdraw the contribution before turning 59.5. If you do, the Roth IRA might make more sense than the Roth 401k because you can withdraw the Roth IRA contributions without taxes or penalties, and that’s probably allowed by the 401k plan (plans vary widely).

If you don’t think you’ll need the money before you turn 59.5, then ask yourself whether you can save more than the $6,000-$7,000 that’s allowed in a Roth IRA. If you can’t, see if your 401k plan has an employer match. If it has a match, use the Roth 401k, but if there isn’t a match, the Roth IRA is likely to be more flexible. Most plans offer a match of some kind, but that varies widely too.

If you can save more than $6,000-$7,000 per year, the Roth option on the 401k makes a lot of sense because you can put away $19,500 – $26,000 depending on your age (age 50 is the magic number).

You’ll pay taxes now at the lower expected rate, and your distributions will be tax-free, presumably when you’re subject to the same rate as today, or higher (back to the impossible question). Any employer matches will be made pre-tax and will be taxed at distribution.

This is a good thing – as much as you might like the Roth option, it’s good to diversify between taxable, tax-deferred, and tax-free accounts. Since you don’t know what the tax regime will be in the future, having a mix should allow you the most flexibility.

All of this assumes, of course, that the government doesn’t change the rules on you. In addition to changing the tax rates, they can change anything else – things that relate to medicare or social security, or whatever – they make the laws!

Personally, I like the Roth option and use it for myself. I know that I’m taking a risk that the rules may change, and I don’t know whether my future tax rates will be higher or lower. I know that I’m missing a deduction today that’s valuable, but I’m willing to take the chance because I like the idea of getting to my money without taxes in retirement.

I’ll let you know how it goes in about 30-40 years.