If you work for a private employer, such as a corporation, you likely have a traditional 401(k) plan. And if you don’t have one, you’re likely to be at least familiar with them.
A traditional 401(k) plan is a retirement savings plan that’s sponsored by your employer, and that is funded via payroll deduction with pre-tax dollars. Recently, though, a new kind of 401(k) has gained popularity. It’s called a Roth 401(k), and it works slightly differently than its traditional cousin.
Contributions to a Roth 401(k) are made through payroll deduction, but they’re made with after-tax dollars, meaning that money going into the plan is taxed as regular income in the year it’s contributed.
You reap the tax benefits from a Roth after you retire. Funds withdrawn from a Roth during retirement are tax-free. This includes both your original contribution, and any growth the account has seen over the years. So, if you plan to use your 401(k) for long-term investing, or if you anticipate being in a higher tax bracket after retirement, a Roth might be a particularly good option for you.
Keep in mind that, just like any retirement plan, a Roth 401(k) carries with it restrictions concerning rollovers and withdrawals. If your employer offers you a choice between a traditional and a Roth 401(k), you’ll want to carefully compare the advantages and disadvantages of each before making a choice. And, of course, it’s best to seek the advice of a qualified financial planner before making any investment decision.