The basic difference between a traditional and a Roth 401(k) is when you pay the taxes. With a traditional 401(k), you make contributions with pre-tax dollars, so you get a tax break up front, helping to lower your current income tax bill. ... With a Roth 401(k), it's basically the reverse.
It may cost you more on the front end to use a Roth 401(k). Contributions to a Roth 401(k) can hit your budget harder today because an after-tax contribution takes a bigger bite out of your paycheck than a pretax contribution to a traditional 401(k). The Roth account can be more valuable in retirement.
If your employer offers both Roth and traditional 401(k) plans, typically you can chose to invest in both. Your total contributions cannot exceed the IRS limits ($19,000 in 2019 + $6,000 catch up for those 50 and older). But within this limit, you can invest a portion in a traditional plan and a portion in a Roth plan.
Roth 401(k)s are better if you believe you will be paying a higher tax rate in retirement than you pay now. Traditional 401(k)s are better if you believe you will pay a lower tax rate in retirement than you pay now.
A Roth 401(k) is a post-tax retirement savings account. ... On the other hand, a traditional 401(k) is a pretax savings account. When you invest in a traditional 401(k), your contributions go in before they're taxed, which makes your taxable income lower.
If you are in the early stages of your career and are currently in a lower income tax bracket, the Roth option is appealing. ... However, if you are in your peak earning years and nearing retirement, it likely makes more sense to take the tax breaks today with a pre-tax traditional 401(k) contribution.
Roth 401(k) plans are typically matched by employers at the same rate as they match traditional 401(k) plans. Some employers do not offer Roth 401(k) plans.
Most financial planning studies suggest that the ideal contribution percentage to save for retirement is between 15% and 20% of gross income. These contributions could be made into a 401(k) plan, 401(k) match received from an employer, IRA, Roth IRA, and/or taxable accounts.
Average 401k Balance at Age 65+ – $462,576; Median – $140,690.
The Excess Amount. If the excess contribution is returned to you, any earnings included in the amount returned to you should be added to your taxable income on your tax return for that year. Excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA.
The difference between a traditional and a Roth 401(k) comes down to when you pay the taxes. While Roth accounts have generally been advised for younger savers, a Roth 401(k) can also give older savers a chance to benefit from tax-free distributions.
Key Takeaways
Roth IRAs offer several key benefits, including tax-free growth, tax-free withdrawals in retirement, and no required minimum distributions. An obvious disadvantage is that you're contributing post-tax money, and that's a bigger hit on your current income.
Any other reasons a high income and/or high net worth person might want to use the Roth 401k? Yes. If you are maxing out your regular 401k and would like to save even more money for your retirement, then consider moving your contributions to your Roth 401k.
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