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Roth 401(k) vs Traditional 401(k)?

Roth 401(k) vs Traditional 401(k)?

July 10, 2018
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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:

                What is a Roth 401(k) 1

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  But qualified withdrawals are not subject to taxes as they come out – all the growth in the Roth 401(k) can be withdrawn tax free. 2 3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.

 

Let us know if we can help.

 

1 https://www.iwmfinancial.com/resource-center/retirement/what-is-a-roth-401k

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.