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).