Keep the Course: Traditional or Roth 401k?

Each Wednesday 401kBasics posts a new article in a weekly series called “Keep the Course”. This series is designed to give the average consumer information on how to keep their 401k plan on track! Your feedback or suggestions on future articles is welcome.

Since Obama signed the Small Business Jobs Act of 2010, the Roth 401k has been the center of attention in the retirement plan industry. Below is an overview of the features of the Roth 401k:

  • Contributions are made with after tax dollars and record kept in your account separately from the pre tax contributions.
  • When you withdraw, if the first Roth contribution was made at least 5 years ago, and you’re at least 59.5 years old, then you won’t be subject to any tax on the distribution. This includes the earnings. This is known as a qualified withdrawal.
  • If you withdraw before it is considered qualified you’ll be taxed on the earnings, however your contributions will not be taxed again.

The difference between the taxation on the Roth and the traditional 401k plan is that the contributions of the latter are made with pre-tax dollars and subject to income tax upon withdrawal.Why would I want to contribute Roth monies instead of traditional contributions?

  • If you think you’ll be in a higher tax bracket by the time you retire, this could be a more beneficial arrangement for you. This could certainly be the case for someone who is just beginning their career, or if you think tax rates will consistently rise.
  • You don’t particularly need the tax deduction at this time.

Not all 401k plans offer the Roth 401k option, but it is becoming an increasingly popular trend. Consult your employer or your 401k service provider to see if you have this feature available in your plan.

This site is for entertainment purposes only. 401kBasics and it’s authors are not financial advisors and no information found on this site should be construed as financial advice.

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