401k And Ira

Roth 401k

Roth 401k - Roth 401K Vs 401K

Roth 401k

Roth 401K's were introduced to the public in 2006. Most of the differences between a Roth 401K and a traditional 401K center on how each investment vehicle treats taxes and how those taxes can be deferred by the investor. As the Roth IRA caused confusion when it was introduced, the Roth 401K promises to do the same.

This article will explain who is eligible to participate in a Roth 401K, the differences between a Roth 401K and a traditional 401K and ultimately which investment vehicle you should choose.

Roth 401k

Who Is Eligible To Participate In A Roth 401K?

You are able to invest in a Roth 401K if your employer offers one. Typically, an employer will offer both a Roth 401K and a traditional 401K and allow the employees to choose which vehicle is best for the personal circumstances and needs. In most cases, you will have the option of putting your entire retirement fund in either vehicle or splitting the funds between the two.

If you choose to place your retirement fund into a Roth 401K and subsequently leave your job, you can roll it over into a Roth IRA.

Roth 401K vs 401K: How Is A Roth 401K Different From A Traditional 401K?

The primary difference between the Roth 401K and a traditional 401K is their respective treatment of income taxes. An individual 401K reduces your income tax during the year you contribute by the amount you contribute to the 401K. But, it is not a free ride from income tax. When you eventually withdraw those funds from your 401K, you must pay 401K tax on the original contribution and any earnings that accrued while the funds were in your 401K.

A Roth 401K does not reduce your income tax during the year you contribute to the 401K. You are required to pay upfront income tax on that year's earnings regardless of whether you contribute to the 401K or not. However, the earnings that accrue in your 401K will not be taxable for the life of your account.

When you decide to leave your employer, you can roll the Roth 401K into an Roth IRA, effectively allowing the earnings in your account to continue to accrue tax-free.

Is A Roth 401K The Right Investment Vehicle For You?

A Roth 401K is a better investment choice for some people than others. Whether you should place your retirement funds into a Roth 401K will depend upon a few factors. First, if you are young and plan to invest immediately, a Roth 401K will allow the earnings in your account to grow over a longer period of time tax-free. This can result in long-term significant growth in your retirement funds.

Second, if you are in a low tax bracket, a Roth 401K allows you the advantage of paying income tax on your earnings at a low tax rate and enjoying long-term tax-free growth of your contributions over the life of your retirement account.

Third, if you expect the government to raise income tax rates in the future, a Roth 401K will allow you to pay taxes on your earnings at the lower tax rates today while enjoying long-term tax-free growth in your account for those earnings.

Ultimately, you will need to weigh your current investment and earning status as well as what you expect the future to hold for tax rates. Doing this is the only way to know with certainty whether you should invest in a Roth 401K

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