masikafinance

For those who have invested in 401K, you have seen Roth 401k and wondered what the difference between Roth and regular traditional 401k is.

The main difference lies on how they are taxed . 401K Roth is a post-tax and traditional 401k is pre-tax. Both offer different benefits depending on your financial situation. To decide which best suits you, a tax professional must evaluate your financial situation.

Generally, traditional 401k suits individuals that expect to earn less at their retirement age and therefore fall in lower tax bracket. In this case, 401k pre-tax may serve you well. Plus, it lowers your taxes every year before retirement age.

On the other hand, 401k post -tax, you pay taxes now and you do not receive the benefits of lower taxes, however at retirement you do not pay any tax when you withdraw your 401k funds. This suits those who expect their tax bracket to be higher at retirement.

So basically, Roth 401k and 401k differ only on when tax is paid on withdrawals. To maximize tax benefits in your particular situation, consult your 401k plan administrator or financial advisor. Vast number of people invest in traditional 401k because it gives immediate tax relieve and most people are likely to make less income at retirement and do not have to worry on higher tax bracket.