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

When enrolling in a 401(k) plan, whether through an employer or on your own, you’ll have the option to enroll in a Roth or traditional 401(k). So, which is right for you? Understanding Roth vs. Traditional 401(k) plans will help you make the best decision for your financial situation.

What Is a Roth 401(k)?

A Roth 401(k) is a type of employer-sponsored retirement account. When you enroll in a Roth 401(k), you’ll make post-tax contributions and withdraw the money tax-free in retirement. Keep in mind that employer matches or profit-sharing contributions are pre-tax. Other types of retirement accounts, like an individual retirement account (IRA), also have a Roth option.

Roth 401(k) 2023 Contribution Limits

The contribution limit for a Roth 401(k) is $22,500 or $30,000 if you’re over 50. There is no income limit for contributing to this retirement account.

What Is a Traditional 401(k)?

If you opt for a traditional 401(k), you’ll make pre-tax contributions to your retirement account. You’ll then pay taxes on this income when you retire. Contribution limits are the same as a Roth 401(k).

Roth vs. Traditional 401(k): What to Consider

Choosing between a Roth and traditional 401(k) account depends on your personal financial situation and goals. If you aren’t sure which retirement account is right for you, speak with a professional like a financial advisor. In the meantime, here are some factors to consider when making your decision.

Estimated Future Earnings

Taking your future earnings into account can help you choose between a Roth or traditional 401(k) option. While it may not be possible to know how much you’ll earn over time, you may be able to estimate based on your industry and career plan.

If you expect to be in a higher tax bracket after you retire, a Roth option may be for you. This is because you’re making after-tax contributions while you’re in a lower tax bracket, rather than paying taxes on the withdrawal when you’re in a higher tax bracket.

Existing Retirement Accounts

You or your spouse might have another retirement account, such as an IRA, outside of your employer-sponsored 401(k) plan. Consider your other accounts when making a decision about your 401(k). What tax benefits do your other accounts offer? Where do you expect to hold the bulk of your retirement savings? A financial advisor can help you strategize for your retirement.

Employer Match

Look at the specifics of your company’s employer match before choosing between a traditional or Roth option. Some employers might not offer a match on a Roth 401(k). Read through the materials that your employer provides when making this decision.

Enrolling in your company’s 401(k) plan is an investment in your own future. Everyone’s path to retirement is different, so there is no one-size-fits-all retirement account. Researching your options and seeking professional advice are among the best ways to make an informed choice.

If you have questions about your 401(k) options, the team at ePlan Services is here to help. Our suite of online tools will empower you with the information you need to make financial decisions, whether you’re enrolled in an employer plan or Solo 401(k). Contact us today to learn more.

This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.