Roth 401(k) vs. Traditional 401(k): What’s the Difference?

When you are starting out in your career, you might not be thinking about retirement just yet. However, the earlier you start saving, the more time you will have to put money away for the future. A 401(k) is a common type of retirement plan that allows you to put a portion of your paycheck away each month, which your employer may match. A 401(k) plan also offers tax advantages on the money that you put away. However, these will vary based on which type of 401(k) you have–traditional or Roth 401(k). No matter what stage of life you are in, the financial advisors at Harvest Wealth Partners can work with you to develop a retirement strategy that is appropriate for your situation.

What is a 401(k)?

A 401(k) is a plan that may be offered by your employer to help you save for retirement. When money is put into your 401(k) account from your paycheck, your employer can also contribute. From there, your 401(k) is invested into a portfolio in the hopes that your money will grow more than if it were simply to be put in savings. Most plans provide options for which investments you can choose. If you have doubts about which plan to go with, a financial advisor may be able to offer advice.

Traditional 401(k) vs. Roth 401(k)

Both a traditional 401(k) and Roth 401(k) offer some degree of tax advantages. The biggest difference between the two is how you pay tax and when. With a traditional 401(k), the money is contributed before it is taxed, but you’ll pay income taxes on it when you withdraw it during retirement. 

By contrast, if your plan is a Roth 401(k), the money you contribute into retirement is already taxed based on your overall income. This counts towards your taxable income and may push you into a higher tax bracket. However, you will not pay income taxes on the money when you withdraw it later.

Choosing a Plan

It can be difficult to know whether a traditional 401(k) or Roth 401(k) is more suitable for your financial goals. A professional can work with you to discuss the short and long term benefits, however there are still some general guidelines that you may wish to keep in mind to better understand the differences between the two plans. 

One thing to consider is your current income and where you expect to be in your career later. If you are in a high income bracket already, then you will most likely pay more income tax overall if you pay it now with a Roth 401(k) than if you were to wait on payment. On the other hand, if you aren’t making very much money now, but expect to be able to contribute more later, then a Roth 401(k) may allow you to avoid paying higher rates during retirement. 

These scenarios both assume that there are no other tax implications involved in raising or lowering the amount you are currently paying in income tax, and do not take into account all factors of a 401(k) retirement plan or tax policies like maximum reductions. 

Scheduling a Consultation with Harvest Wealth Partners

If you are preparing to choose a retirement plan, there are many factors to consider when deciding whether a traditional 401(k) or Roth 401(k) is more suitable for your situation. Consulting a professional may help you strategize ways to work your chosen retirement plan into your overall wealth management strategies, so you can begin making steps towards achieving your financial goals. To learn more or schedule a consultation, contact us today. 

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. 

Investing includes risks, including fluctuating prices and loss of principal.​ No strategy assures success or protects against loss. 

A Roth 401(k) offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. 

Contributions to a traditional 401(k) may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

This material was prepared for Harvest Wealth Partner’s use.