And that depends a lot on your timeframe as well as what the future may look like.Ī tax deduction now can seem like a pretty good deal, but you have to think ahead. So it mostly comes down to deciding when it's better for you to pay the taxes-now or later. However, withdrawals of both contributions and earnings are tax-free at age 59½, as long as you've held the account for five years. You make your contributions with after-tax dollars, meaning there's no upfront tax deduction. With a Roth 401(k), it's basically the reverse. (With certain exceptions, you'll also pay a 10 percent penalty if you're under 59½.) At that time, withdrawals are considered to be ordinary income and you have to pay Uncle Sam his due at your current tax rate there may be state taxes as well. Your money-both contributions and earnings-grows tax-deferred until you withdraw it. With a traditional 401(k), you make contributions with pre-tax dollars, so you get a tax break up front, helping to lower your current income tax bill. The basic difference between a traditional and a Roth 401(k) is when you pay the taxes. So how do you decide? Let's start with the basics. Unlike a Roth IRA, there are no income limits on a Roth 401(k), so the door is wide open for older, higher-earning employees to get the benefits of tax-free withdrawals later on. Lately, however, financial advisers have been pointing their older clients toward Roth accounts as well. That's because, typically, they're currently in a low income tax bracket, and the up-front tax deduction of a traditional retirement account is less valuable now than the tax-free withdrawal of a Roth down the road. You'll often hear that a Roth account, whether an IRA or a 401(k), may be a good option for young investors. But with more and more employers now offering a Roth 401(k) as well, it's smart to take a step back and consider the potential benefits of each. Once you've opened a specific type of account-for instance a traditional 401(k)-it's tempting to just figure you're set. The sheer number of retirement accounts can make anyone's head spin. I've been contributing to a regular 401(k) for 8 years but my employer just started offering a Roth 401(k) plan as well. For more information about the SECURE Act 2.0, please read this article or speak with your financial consultant. Please note: This article may contain outdated information about RMDs and retirement accounts due to the SECURE Act 2.0, a law governing retirement savings (e.g., the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account will change from 72 to 73 beginning January 1, 2023). Id="body_disclosure-media_disclosure-89431" (1222-2NLK) this article or speak with your financial consultant.
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