401k General Info For Employees

Traditional vs. Roth: What’s the Difference?

In addition to a traditional 401(k), your employer has added the Roth 401(k) deferral option to your retirement plan.

In a traditional 401(k) plan, contributions are made with before-tax dollars. The money is not taxed while it remains in your account, but every dollar taken out is taxed as ordinary income. Contributions to a Roth 401(k) are made with after-tax dollars, so initially they won’t reduce your tax bill. However, the money will grow tax- free, and all withdrawals after age 59 1/2 will be tax-free. In other words: A regular 401(k) plan gives you a tax break on the front end, the Roth 401(k) gives it to you on the back end.

Which is Right for You?

There is no one-size-fits-all answer. Instead, the right answer for you will depend on your current tax situation and whether your tax rate is likely to be higher or lower in retirement.
Since you don’t pay any taxes on Roth withdrawals, the higher your tax bracket in retirement, the more advantageous a Roth is likely to be. Strong savers—including those who contribute the maximum amount allowed by the IRS each year—are good Roth candidates because they are likely to have a bigger nest egg in retirement that can benefit from Roth’s tax-free withdrawals.

On the other hand, if you’re in a low tax bracket today, you might consider a Roth now, when a lowering of your gross income will not be as significant a tax benefit as it might be later on, if you find yourself in a higher bracket.

Because it comes right out of your paycheck, a Roth contribution is likely to reduce your take home pay by more than a similar contribution to a traditional 401(k), which is made using pre-tax dollars. If you want to save—and take home as much money as possible—a traditional 401(k) is perhaps the way to go.

Finally, since no one knows what tax rates will be in the future, diversifying with contributions to both a traditional 401(k) and Roth might be a way to hedge your tax bets with your retirement savings.

There are many variables to consider when deciding if a Roth 401k is right for you. We recommend that you speak to your tax accountant or financial professional to help determine if the Roth is appropriate for your circumstances.

You may contribute to one or both accounts, but you may not double up your contribution by having both types of 401(k) accounts. The same contribution limit will apply to either account, or both combined. If your employer provides a matching contribution, the match must be put into the traditional 401(k) account — subject to the regular 401(k) rules — even if you are directing all of your contributions into a Roth 401(k). Loans are not available in the Roth 401(k).