What Is the Difference Between a 401(k) & a Roth 401(k)?

Roth 401k plans and traditional 401k plans are two retirement savings plans offered by through your employer. However, they differ in the tax benefits and how matching contributions are made.

Contributions

Contributions made to a traditional 401(k) are made with pretax dollars so you reduce your taxable income. Roth 401(k) contributions are made with after-tax dollars.

Distributions

You can withdraw your money from a Roth 401(k) account tax free at retirement. You must pay taxes on your withdrawals from a traditional 401(k) account.

Matching Contributions

The matching contributions that your company makes when you contribute to a traditional 401(k) can be added to that traditional 401(k) account. When you contribute to a Roth 401(k), the matching contributions must be put in a separate, traditional 401(k) account.

Which is Better for You?

The tax benefits of a Roth 401(k) are better for people who expect to be in a higher tax bracket when they retire than they are currently in. Traditional 401(k) plans are better for people who are in a higher tax bracket when they make the contributions.

Considerations

Not all employers offer Roth 401(k) plans because Roth 401ks were introduced in 2006. If not offered by your employer, you cannot contribute to a Roth 401(k) on your own.

References

• Understanding the Roth 401(k)
• Roth 401(k) or 403(b) Compared with Roth IRA
• Time: A Brief History of the 401(k)