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


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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