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Traditional 401k vs. Roth 401k

Dylan Telerski / 12 Feb 2019 / 401k Resources, Personal Finance

You’re contributing to your workplace retirement account–that’s great! But how are you dealing with the taxes of the money you can contribute. There are two ways you put money into your 401(k) retirement plan– pretax or Roth.

Pretax contributions are the traditional form of 401(k). This means contributions come out of your paycheck before taxes, and are your distributions in retirement are taxed. This is useful if you’re earning more now than you plan to in retirement. Plus, you lower your taxable income in the present!

Think of the Roth 401(k) as the rebellious little sister of the pretax 401(k). Introduced in the early 2000s, it takes the tax treatment of a Roth IRA and applies it to your employer-sponsored plan. That means contributions come out of your paycheck before taxes, and distributions in retirement are tax-free. That means you don’t pay taxes on your investment growth!

Let’s look at the similarities (and differences) between the two retirement contribution types.

The 401(k) contribution limit is $19,000 with an additional $6000 if you are 40 or older. The conribution limit is the same whether your 401k deferrals are made pretax, Roth, or a combination of the two.

Traditional 401(k) plans are pretax savings accounts. This means your contributions are made before they've been taxed. Roth 401(k) plans are post-tax savings accounts. This means your contributions are made after they've been taxed.

If you contribute to a 401(k) plan at work, your employer can choose to match a percentage of your contribution. Any employer match will be taxable in retirement.

All About Withdrawals: In a traditional 401(k) distributions in retirement are taxed, just like ordinary income. In a Roth 401(k) there are no taxes on qualified distributions in retirement.

 

Learn more

Curious about different types of retirement accounts? Learn the difference between an Individual Retirement Account (IRA) and a 401(k).

If you’re a small business owner and need a 401k plan for yourself and your company, only Ubiquity offers flat-fee plans plus free expert advice. We’ll fully customize your 401k to meet the specific needs of your small business.

Check out our cost-effective, plan solutions

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44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

© 2019 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357