The key difference between a traditional 401k account and a Roth 401k account

What makes a Roth 401k different than 401k is that your contributions into the account are post-taxed instead of pre-taxed. This means you cannot use the contributions to lower your gross income. However, when you start to withdraw money from your Roth 401k account, it will not be taxed.

Example:

You are currently making $50,000 annually and contributing $5,000 a year to your company's 401k plan. Your taxable income is actually $45,000 ($50,000-$5,000) of which you may be able to take home $30,000.

Under the Roth 401k plan, your taxable income is $50,000. You take home $33,000 and contribute $5,000 of that into your Roth 401k account leaving you with $28,000.

But wait, you're now taking home less money now than under your traditional 401k plan. What happened?

You contributed post-taxed money into the Roth 401k plan instead of pre-taxed money. What you're giving up today, you'll get back when you retire and are able to start withdrawing from your Roth 401k account. The money you withdraw from your Roth 401k plan when you retire will not be taxed again whereas under the traditional 401k plan, it will be taxed as regular income.

Roth 401k is just another option in your toolbox for retirement saving. You must decide for yourself which plan is better for you.

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