Differences Between Roth & Retirement 401(K)Submitted by Integrity Capital on January 8th, 2018
There is a new kid on the block: the Roth 401(k). The Roth 401(k) is a retirement savings account that may now be available in your retirement plan at work. There are many companies choosing to integrate this new plan into their packages so it is important that you stay up to date on how this differs from the traditional 401(k). Similarly, it is best to be knowledgeable on this opportunity for it might serve you better in the long run depending on your future retirement plan. Check out these facts below about how the two plans differ to see which one you may need.
In the simplest terms, the Roth 401(k) applies the tax regulations of the Roth IRA to the plan instituted by your employer, meaning that although it comes out of your paychecks, you don’t pay taxes on the growth of your account. In terms of a traditional 401(k), the taxes are applied once the money is withdrawn from the account.
One strategy is to try to utilize both accounts at the same time. Although it may sound contradictory, both accounts are contributing to a retirement fund, just in different forms. They are serving two different needs that could benefit you if maximized properly. However, that is not always the case, so it is important to know the differences between the two accounts to help you make the most prudent decision. In the traditional plan, your contributions lower your adjusted gross income, while the Roth account has no effect on lowering your Adjusted Gross Income (AGI) because the contributions are made after taxes. For traditional 401(k) accounts, the withdrawals are taxed at the time of a distribution. However, for Roth 401(k) accounts, the contributions do not lower your AGI, which means they are essentially taxed at the time of the contribution.
The decision is all about what makes sense for your finances now, and how you want your finances to be in the future. If you are more focused on reducing the amount of taxes applied to your current income, then a traditional 401(k) may be the better route for you. If you want to maximize after-tax income in retirement and are willing to pay more in taxes now, then the Roth 401(k) may be a more suitable option. It all comes down to how you plan on managing your finances currently and your investment options for the future. There are other contributing factors to whether or not it is a smart decision to transition to the new plan, such as limitations, access, eligibility, and minimums. For more information about the new Roth 401(k) plan and whether or not it would be beneficial to your financial future, contact Integrity Capital. We are located in Covington, Kentucky and serve the surrounding areas of Florence, Kentucky, Cincinnati, Ohio, and the entire region of Northern Kentucky.