Traditional 401k vs. Roth 401K vs. a Roth IRA
By: Aimee Malgapo
A traditional 401(k) is an employer-sponsored retirement plan that gives employees a choice of investment options. You can choose to have a portion of your paycheck moved into a 401k, and your employer can match your contributions to your 401k at a certain percentage. In a traditional 401k, contributions from your employer and yourself will be taxed when the funds are withdrawn. That means that all the money that goes into your traditional 401(k) is not taxed, and this will reduce your taxable income when you pay your taxes.
A Roth 401k is also an employer-sponsored retirement investing plan, but with this option, the money is taxed before you or your employer make contributions. This means that when the money is withdrawn, all the money will be taken without any additional taxes.
The maximum you can contribute to your Roth 401(K) or traditional 401(k) is $22,500. If you are in a high tax bracket, it makes sense to contribute to a traditional or pre-taxed retirement plan so that you can lower your tax burden now and, in the future, when you have a lower income, you can pay the lower tax rate then. If you are expecting your income to be higher at retirement or if you plan to live in a state that has a higher tax, such as California, you would want to choose a Roth 401k and have your contributions taxed sooner rather than later.
A Roth IRA is an individual retirement account (IRA) where you can contribute after taxed dollars. If your employer does not offer a 401(k) for you, a Roth IRA is a great option to begin planning for your retirement. Charles Schwab, Fidelity, and Vanguard are a few online brokerage accounts where you can open a Roth IRA.
Resources:
https://www.investopedia.com/retirement/401k-contribution-limits/
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