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Traditional 401(k) Versus Roth 401(k) – What’s The Difference?

When it comes to selecting between a Traditional 401(k) vs. a Roth 401(k), you may be wondering which is the better choice. Both are great retirement vehicles, but they do differ. Here are a few points to consider when selecting between a Traditional or Roth 401(k).

401(k) Taxes

The main difference and separating factor between the two is how the taxes are paid on them. 

Traditional 401(k) contributions come out of your paycheck before taxes, lowering your taxable income. Since the contributions are made before taxes are deducted, you’ll pay taxes at the time you decide to withdraw from it. 

On the other hand, Roth 401(k) plan contributions are made after taxes have been deducted. Unlike their traditional counterpart, Roth 401(k) plans do not lower your taxable income, however, once you decide to withdraw from it upon your retirement, you won’t have to pay taxes. 

Accessing Your 401(k)

Aside from the taxes, there is also a difference in when you can access your retirement savings. If you own a traditional 401(k), then you can begin receiving distributions at age 59 ½. Withdrawing from it any earlier than that will result in a 10% penalty fee. 

As for a Roth 401(k), you can begin withdrawing money from it at the same age, 59 ½, however, there is a catch. You must own the account for five years before withdrawing it. If you’re still far from retirement, then this shouldn’t be an issue, however, if you’re planning to retire with five years, then a Roth 401(k) may not be the best choice. 

Which Is The Better 401(k) Option?

Deciding which plan is better is a subjective choice, and comes down to if you want to pay taxes now, or later. If you want more money in the bank now, and don’t care so much about paying taxes later, then a traditional 401(k) may be a better option for you. If you can afford to take home a smaller paycheck right now and like the thought of not having to pay taxes on your retirement withdrawals, a Roth may be better.

Are you a small business owner looking to offer your employees more 401(k) options? Look no further! Here at Saveday, we provide multiple plans that you can offer your employees, such as traditional, Roth, safe harbor, single, and simple 401(k) plans. Contact us to learn more.

Photo by You X Ventures on Unsplash.