What is a Roth 401k?
Many people are familiar with the typical employer-sponsored 401k plans and Roth IRAs, though most aren’t as familiar with Roth 401ks.
These plans combines features of traditional plans with a Roth IRA.
Like a Roth IRA, contributions made to a Roth 401k are made using after-tax dollars. Qualifying withdrawals are not subject to income taxes. In addition to this, any capital appreciation in this account is also not subject to income taxes.
Which 401k should you choose?
Choosing between a Roth 401k and a traditional 401k comes down to taxes. A traditional account will give you an upfront tax break, while a Roth 401k has the benefit of tax-free withdrawals. Understanding how these different avenues can help or hinder your retirement plan is critical in making this decision. Always consult with a professional to help decide which is best for you.
To help determine which tax benefit will help you more, there are a few key considerations to take into account. For example, a Roth 401k plan is not subject to income restrictions like a Roth IRA. This comes as an advantage to high-income individuals with a Roth IRA already limited by the income restrictions.
Roth 401k plans share the same annual contribution limits as traditional plans. Bear in mind, these are cumulative contribution limits that apply to all accounts with a single employer. This means that you won’t be able to contribute the same amount to both a traditional 401k and 401k.
When contributing to a Roth 401k plan through an employer, the actual employer matches are made using pre-tax dollars. However, the matched funds themselves will be taxed as ordinary income when it comes time to make withdrawals.
To sum it up, there’s a lot of intricacies to consider when deciding between the two 401ks. Properly planning for retirement is important. If you’re unsure of the best option for your plan, consult with a professional.