Choosing between a Roth 401(k) and a Traditional 401(k) can significantly impact your retirement savings. Each has unique benefits and tax implications, making the right choice dependent on your financial situation and future goals.
Tax Treatment
- Traditional 401(k): Contributions are made pre-tax, reducing your taxable income now. Withdrawals in retirement are taxed as ordinary income.
- Roth 401(k): Contributions are made after-tax, meaning no immediate tax benefit. However, qualified withdrawals are tax-free.
When Each Option Makes Sense
- Traditional 401(k)
- Best for individuals who anticipate being in a lower tax bracket during retirement.
- Ideal if you need an immediate tax break.
- Roth 401(k)
- Suitable for those who expect to be in a higher tax bracket in retirement.
- Great for younger workers with decades of tax-free growth potential.
Contribution Limits and Employer Matching
- Both options share the same annual contribution limit ($22,500 for 2024, or $30,000 if 50+).
- Employer matches are always made pre-tax, even if you choose the Roth option.
Hybrid Approach
Many plans allow you to split contributions between Traditional and Roth accounts, offering tax diversification.
Choosing between a Roth 401(k) and a Traditional 401(k) depends on your current and expected tax situation. Consider consulting a financial advisor to tailor your strategy.
