Roth 401k Vs. Normal 401k

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Roth 401k and normal 401k accounts provide tax-sheltered plans for retirement savings to grow.
Roth 401k and normal 401k accounts provide tax-sheltered plans for retirement savings to grow. (Image: Image by Flickr.com, courtesy of kevinzhengli)

Roth 401k plans and normal 401k plans are retirement plans that are sponsored by your employer. Putting money in these plans allows it to grow tax-free as long as it remains in the account.

Contributions

Contributions to a normal 401k plan are made with pre-tax dollars, which means that money is not taxed as income that year. Contributions to Roth 401k plans are made with after-tax dollars, meaning you have to pay taxes on the contributions as part of your income.

Withdrawals

When you withdraw money from your normal 401k, you must report the money as income on your taxes. When you withdraw money from your Roth 401k, the money is taken out tax-free.

Matching Contributions

Matching contributions made by your employer for your contribution to a normal 401k can be added to that same account. Matching contributions made by your employer for your contributions to a Roth 401k must be put into a normal 401k.

Considerations

When deciding which to invest in, you should generally choose the Roth 401k if you expect to fall in a higher tax bracket at retirement than you are in now because the savings you reap when you withdraw the money will outweigh the tax savings of contributing to a normal 401k.

History

The Roth 401k was introduced in 2006 while the normal 401k plan was introduced in 1978.

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