Q:

What is the difference between a Roth 401k and a Traditional 401k?

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Quick Answer

In many respects, the Roth and traditional 401(k) individual retirement accounts (IRA) are very similar, and the main difference between the two has to do with taxes; with a Roth 401(k), the account holder pays contributions into her account with after-tax income, while contributions to a traditional 401(k) are based on pre-tax income, as described by Charles Schwab. Retirees with a traditional 401(k) must pay taxes on withdrawals from the account, but those with a Roth 401(k) can make withdrawals without paying taxes as long as the account has been open for 5 or more years and those withdrawals occur after age 59 1/2.

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Full Answer

The Roth 401(k) could be a beneficial choice for younger investment planners who are currently in a low tax bracket. That's because they could end up being in a higher tax bracket after retirement, so paying taxes on the contribution amount at the current lower-income tax bracket leads to a net savings on the amount in the Roth 401(k), notes Schwab. Conversely, older investors or individuals who are currently making a good salary and intend to have less yearly income when they retire are better suited to the traditional 401(k) because the deferred tax payments would apply to the lower-income tax bracket that applies after retirement.

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