Roth 401(k) Meaning | Is Roth 401k Better than 401k?

What is a Roth 401k?

An employer-sponsored Roth 401(k) is a retirement savings account financed using post-tax deduction money. This means that the earnings the employee withholds from each paycheck stub and deposits into the account are immediately subject to income tax. Upon retirement, withdrawals from the fund are tax-free.

The standard 401(k) plan, funded with pre-tax deductions money, differs from this type of plan. In this scenario, taxes are only owed when the money is withdrawn from the account because payroll deductions are taken from the employee’s gross income.

Is a Roth 401k Better than a 401(k)?

Whether a Roth 401(k) is better than a 401(k) solely depends upon your financial situation and goals. Let’s churn down the main differences:

Tax Treatment:

Roth 401(k): Contributions made to Roth 401(k) are made with after-tax dollars means you don’t get a tax deduction straightforwardly.
Traditional 401(k): Contributions made to Traditional 401(k) are made with pre-tax dollars, reducing your present taxable income.

Tax Diversity:

Getting both Traditional and Roth retirement accounts will provide tax diversification in retirement. This will allow you to choose from where to withdraw funds and potentially enhance your tax efficiency.

Future Tax Rates:

If you assume being in the broader tax space during retirement, a Roth 401(k) can be beneficial, as you’ve already paid the taxes on contributions, and withdrawals won’t be taxed.

Growth in Investment:

Both Roth and Traditional 401(k) offer tax-deferred growth, which means you don’t have to pay taxes on the earrings you make until you withdraw funds.

Withdrawal Rules:

Roth 401(k): Contributions can be withdrawn at any time without any penalties, but earnings can be subject to penalties if you have withdrawn before the age of 59 and before your account has been opened for at least 5 years.
Traditional 401(k): Any withdrawal before age 59 is subject to a 10% early withdrawal penalty.