As you save money into your 401(k), you might be able to choose whether to direct your funds into a Traditional 401(k) or a Roth 401(k).
What is a Roth 401(k)? Check out this article to find out more:
With a Roth 401(k), money goes in after tax, like the money that gets deposited into your checking account from your paycheck. You didn’t take the tax deduction like a traditional 401(k). But qualified withdrawals are not subject to taxes as they come out – all the growth in the Roth 401(k) can be withdrawn tax free. 2 3
So the question is, should I pay the tax (Roth 401k) now or pay the tax later (Traditional 401k)?
Here is a calculator tool to help compare deposits between the Traditional deductible 401(k) and the after tax Roth 401(k).
We always recommend you speaking with a tax advisor.
2 Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
3 Roth IRA contributions cannot be made by taxpayers with high incomes. To qualify for the tax- free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawal also can be taken under certain other circumstances, such as a result of the owner’s death or disability. The original Roth IRA owner is not required to take minimum annual withdrawals.