Retirement Basics Roth 401(k) vs. Traditional 401(k)

A Roth 401(k) plan takes many of the advantages of the Roth IRA and combines them with a traditional 401(k) plan. Under a Roth 401(k), participants are allowed to make contributions as deductions from their paychecks, however these contributions are on an after-tax basis. This differs from a traditional 401(k) in which contributions are made on a pre-tax basis. This allows employees to begin a retirement savings program with tax-free growth until withdrawals are taken after 5 years and they reach the age of 59.5, unless exceptions apply. The goal here is for employees with a lower income level who anticipate having a higher income level during retirement to be able to pay the taxes on that higher income now, at a lower tax rate. Others who may consider this option would be those who are in high tax brackets and expect U.S. tax rates to increase in the future.

Other advantages of the Roth 401(k) are that the contribution limits mirror those of a traditional 401(k), which are $16,500 for those under age 50 and $22,000 for those 50 years of age or older. Roth 401Ks also offer an employer match, however the match must be on a pre-tax basis, similar to that of a traditional 401(k). Additionally, an employer has the choice whether or not they want to offer the option of the Roth 401(k). Some find that the administrative work involved is more than they want to bear. Roth 401(k) contributions are irreversible and monies can be rolled over into a Roth IRA upon termination of employment. Required minimum distributions, such as those available for traditional IRAs and 401Ks at age 70.5 don’t apply to Roth IRAs, but do apply to Roth 401Ks.