For many years, employees of companies that offered 401(k) plans only faced a couple of key decisions – how much to contribute and how to allocate their dollars among the various investment options in their plan. In recent years, a third choice has emerged: the traditional versus Roth 401(k). Which is right for you?
To begin with, you need to understand the key difference between the two types of 401(k) plans. When you invest in a traditional 401(k), you put in pre-tax dollars, so the more you contribute, the lower your taxable income.
Your contributions and earnings grow tax-deferred until you begin taking withdrawals, which will be taxed at your ordinary tax rate. With a Roth 401(k), the situation is essentially reversed. You contribute after-tax dollars, so you won’t lower your taxable income, but withdrawals of contributions and earnings are tax-free at age 59-1/2, as long as you’ve held the account at least five years.
To read more, pick up a copy of the March/April issue of LiveIt magazine.