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The 401(k) vs Roth 401(k): What You Need to Know

The 401(k) vs Roth 401(k): What You Need to Know

April 30, 2019
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Roth 401(k)s are becoming more common. In fact, over half of companies that offer a retirement savings plan offer a Roth 401(k). So, here's what you need to know regarding a 401(k) and a Roth 401(k).

{AUDIO} The 401(k) vs Roth 401(k): What You Need to Know

Contribution limits are the same

The most you can contribute to your 401(k) is $19,000/year if you're under 50 years old, $25,000/year if you're 50 years old or older. This limit is the same for a Roth 401(k). To put that in perspective, contribution limits on a Roth IRA are now $6,000 and $7,000/year, respectively, with the same age thresholds.  

Both can include the company match

Many companies will match your contributions up to a certain percentage. The company match can be used utilized with both a 401(k) and a Roth 401(k). The only caveat is the matched contributions from your company cannot be held within the Roth 401(k) account. That money must be held in a separate IRA within your retirement saving plan.

They are taxed differently

Just like the Roth IRA, your money goes into a Roth 401(k) after-tax. That means you’re paying taxes now and taking home a little less in your paycheck. When you contribute to a traditional 401(k), your contributions are pretax. They’re taken off the top of your gross earnings before your paycheck is taxed.

Which one is best for me?

As usual, there's isn't one broad-brush answer to this question. However, if you're not nearing retirement and your company has a Roth 401(k) option, go for it! But, if you're close to retirement, you may need the guidance of a professional regarding tax implications and access to your money upon retirement. With a 401(k), you can start receiving distributions at age 59 1/2. With a Roth 401(k), you can start withdrawing money without penalty at the same age, but you also must have held the account for five years.

Again, If you’re still decades away from retirement, you don’t have anything to worry about. But if you’re approaching the 59 1/2 year mark and thinking about starting a Roth 401(k), it’s important to be aware that you won’t have access to the money for five years.

If you have questions or need guidance on your 401(k) or Roth 401(k), I'd be glad to help.

Email me at matt@taatjesfinancial.com or call 320.222.4236.