I was asked recently about the differences between traditional 401k plans and Roth 401k plans. Want an easy answer? Well, the Roth 401k is a great choice for almost everyone. Let’s get into the details before you make any hasty decisions!
What is a Roth 401k Anyway?
It’s just like a typical 401k, but with some minor differences.
Both are workplace retirement savings options.
Just like a 401k, your employer still manages your plan.
Also, just like a typical 401k, money is taken out of your paycheck and placed within the Roth 401k plan. Once in the Roth 401k, you control the investment choices.
So What Are the Differences?
This is where it gets a little tricky. The money that goes into a Roth 401k is post-tax $’s. It’s both a negative and a positive. It’s bad because your taxes today are higher. But the good is that you will never have to pay taxes on your distributions during retirement!
Yes, you read that right. You pay zero taxes when you withdraw during retirement! Sounds good to me.
Now, for the DEBATE! Taxes, taxes, taxes. This debate comes down to the pre-payment of taxes. With a Roth 401k, you pre-pay taxes now, so you avoid paying taxes later.
With a traditional 401k, you avoid taxes now and pay taxes later. The goal is to lessen your tax burden of your retirement accounts. We could go on and on about the tax benefits and downfalls of a Roth 401k. I’ll let the Finance Buff explain the tax side of the debate, as he is much more knowledgeable on this subject.
He presents a great case to NOT contribute to a Roth 401k, but I disagree with his view of future taxes. With the way taxes are going up now, crippled economy, and the fall of the dollar, I foresee extremely high taxes 30+ years from now.
How Much Can You Contribute to Your Roth 401k?
This is the best part. Unlike a traditional Roth IRA, you can contribute a maximum of $19,000, and there are no income limitations for a Roth 401k. You could be a multi-millionaire and still contribute!
What Other Benefits Are There?
Another key benefit is the rollover option. Let me give you an example. Say a dude named Bill is working away at corporation ABC, and he is actively contributing to his employer’s Roth 401k plan.
On Monday, Bill finds a pink slip at his desk and now he’s fired. What happens to his Roth 401k contributions? The good news is that Bill can rollover his contributions to an individual Roth IRA and maintain tax-free growth.
Hmm, as for taxes, with the FED creating trillions of dollars out of thin air? There WILL be repercussions for that. And guess who will be paying for it? You and me, that’s who.
So protect your assets and retirement future by contributing to a Roth 401k today. Remember to keep a well diversified portfolio and invest for the long-haul. Get to it!