I still have about 40 years to go until retirement. If my 401k has a choice to do traditional pre-tax or Roth post-tax contributions, would it be better to do about half and half to hedge against future tax rates, or do all Roth for now since I'll have 40 years of tax free compounded returns?
Tyler, As with most of these sorts of questions, the answer isn't a definite one way or the other. You need to weigh the current tax reduction that would occur if you contribute to the traditional 401(k) versus the future tax savings on the growth of the fund. If your income is relatively high now, the tax savings from contributing to the traditional 401(k) might be more beneficial to you; at the same time, if the growth is significant and future tax rates are higher, making the Roth more attractive.
Of course, there's no way to know what the future growth will be, nor is there a way to know what the future tax climate will be. As you've suggested, it might make sense to put a portion of your money in each type of account and thereby achieve tax diversification. Keep in mind that any employer matching contributions will always be in the traditional 401(k) account, so if you're looking to achieve a 50/50 balance, account for the matching funds as well.
For example, if you are able to contribute $10,000 to your account this year and your employer match will be $2,500, you would want to put $6,250 in the Roth and $3,750 in the traditional account in order to balance out at 50% in each account.
If you have 40 years until retirement, then in it is highly likely that the ROTH will be the better option. Even if tax rates drop in the future, your time horizon is so long and the value of the compounded returns is likely to be so significant, that the ROTH will be a superior option in most circumstances. You can test your assumptions with a ROTH calculator we have developed at http://roth.nc.am to see for yourself.
HI Tyler, this is becoming a more and more common question for those offered a Roth 401k option. I am glad to hear your firm offers this version to you. I think the Roth 401k will be a true financial gift to those who take advantage of the future tax savings. If you want to hedge, you could always split some into the traditional 401k or even an IRA.
Tyler, with 40 years to go until retirement, and considering that Roth distributions will be tax-free, rather than just tax deferred, it is a pretty good idea to get as much into the Roth option as possible. Your company match will still be pre-tax/tax-deferred anyway.
Probably half and half but it really doesn't matter that much. What's most important is how much you invest and starting asap. I recommend at least 6% up to the max if you can. Best of luck.