While many people are familiar with the benefits of traditional 401(k) plans, others are not as acquainted with Roth 401(k)s.
Since January 1, 2006, employers have been allowed to offer workers access to Roth 401(k) plans. And some have introduced offerings as part of their retirement programs.
As the name implies, Roth-401(k) plans combine features of 401(k) plans with those of a Roth IRA.2,3
With a Roth 401(k), contributions are made with after-tax dollars – there is no tax deduction on the front end – but qualifying withdrawals are not subject to income taxes. Any capital appreciation in the Roth 401(k) also is not subject to income taxes.
What to Choose?
For some, the choice between a Roth 401(k) and a traditional 401(k) comes down to determining whether the upfront tax break on the traditional 401(k) is likely to outweigh the back-end benefit of tax-free withdrawals from the Roth 401(k).
Please remember, this article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax professional before adjusting your retirement strategy to include a Roth 401(k).
Often, this isn’t an “all-or-nothing” decision. Many employers allow contributions to be divided between a traditional-401(k) plan and a Roth-401(k) plan – up to overall contribution limits.
Considerations
One subtle but key consideration is that Roth 401(k) plans aren’t subject to income restrictions like Roth IRAs are. This can offer advantages to high-income individuals whose Roth IRA has been limited by these restrictions. (See accompanying table.)
* This is an aggregate limit by individual rather than by plan. The total of an individual’s aggregate contributions to his or her traditional and Roth 401(k) plans cannot exceed the deferral limit – $20,500 in 2022 ($27,000 for those over age 50).
