401(k) Professional tips to help you save for your future – 5 of 20
Saving for retirement should be a top priority for everyone, since there will come a day when you no longer can, or want to, work. The funds you have accumulated in your retirement savings account will ultimately shape how you live in retirement. Employer-sponsored 401(k) plans are a great way to find success to that end.
Shelton Pro-Tip #5:
Understand the difference between Traditional and Roth 401(k) Plans.
In today’s competitive marketplace, most employers offer 401(k) plans to help their employees plan for retirement. In fact, many offer two different options: the Traditional 401(k) plan, and its close cousin the Roth 401(k).
First, know what’s the same about the two plans: The 401(k) contribution limit applies to both accounts — $19,500 per year, not including employer matching dollars — and workers 50 or older get to contribute an extra $6,500, for a total of $26,000.
Where the Roth 401(k) and the Traditional 401(k) differ is how contributions and distributions are taxed:Contributions to the Roth account go in after-tax and withdrawals in retirement are tax-free, while traditional 401(k) are funded with pre-tax dollars and distributions are taxed at the retiree’s current tax bracket.
So, Traditional vs. Roth 401(k) – which one is better?
Everyone’s situation is different, so there is no exact answer. But it can be said with some confidence your decision mainly comes down to how you want to put money into the account and how you want to take money out.
- Roth 401(k): Since there will be no tax implications on withdrawals, this might be the right option for someone who believes he or she will be in a higher tax bracket in retirement. If you’d prefer to pay taxes now and get them out of the way, consider a Roth 401(k).
- Traditional 401(k): This option might be optimal for someone who expects to be in a lower tax bracket when they retire. If your primary goal is to reduce your taxable income now or to put off taxes until retirement because you think your tax rate will go down, consider a Traditional 401(k).
Each option serves its purpose, and participating in both types of plans can help diversify your tax implications. You can contribute to both accounts in the same year, and many plans allow for you to switch back and forth throughout your career or even during the year, as long as you keep your total contributions under the cap.
Whether you choose a Roth or a Traditional 401(k), there is a wealth of advice available to you on how to manage your plan. Check out Shelton’s library of 401(k) Educational Videos to help you make good choices and stay on a good retirement track.
Here’s to your success!