Roth and traditional 401(k) plans compared
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401(k) plans compared


Traditional 401(k)

  • Annual contribution limit: Set by employer, up to $15,000 ($20,000 for employees age 50 and above).

  • Matching contributions: Allowed. May be combined with employee contributions.

  • Tax status of employee contributions: Deductible from current income.

  • Tax status of withdrawals: Taxable as ordinary income.

  • Mandatory withdrawals: Required minimum distributions starting at age 70½.

  • Best for: Employees who need the current tax deduction. Employees who will make withdrawals within five years. Employees who will be in same or lower tax bracket in retirement.

  • Concerns: All growth in the account, including capital gains on equity investments that would qualify for favorable capital-gains treatment if earned outside a retirement account, are taxed at ordinary income rates.

Roth 401(k)

  • Annual contribution limit: Set by employer, up to $15,000 ($20,000 for employees age 50 and above).

  • Matching contributions: Deposited separately in a traditional 401(k) account. Taxed when withdrawn.
  • Tax status of employee contributions: Made with after-tax dollars; not deductible from current income.
  • Tax status of withdrawals: Not taxable. 
  • Mandatory withdrawals: required minimum distributions starting at age 70½.
  • Best for: Employees who do not need the current tax deduction. Employees who will not make withdrawals for five years or more. Employees who will be in higher tax bracket in retirement.

  • Concerns: If tax rates decline, early payment of taxes will have been counter-productive. Requires giving up more current income to maximize employer match.
 

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