Roth 401k vs 401k // Roth 401k Explained. There are NO INCOME LIMITS for Roth 401k contributions! With over 70% of employer sponsored 401(k) plans now offerring the Roth 401k provision it is becoming a more and more popular and common employer retirement account to contribute to. In this video I explain how the Roth 401k works and we compare your options of the Roth 401k vs 401k. With taxes being at historically low levels, it may make sense in your situation to forego the pre-tax 401k deduction, pay the taxes now, and let your Roth 401(k) contributions grow tax-free.

My wife and I contribute 100% of our contributions into our Roth 401(k) and the employer match is placed into the pre-tax / Traditional 401k (which grows tax deferred). If you’re not sure which one to contribute to….this video is for you!

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I’ve been involved in people’s financial decisions for 15+ years (7 yrs Real Estate experience & 8+ yrs as a former Financial Advisor)…I now bring the financial successes, mistakes, failures, and best financial habits/tips to you through these videos.

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LEARN MORE ABOUT: 401k Plans

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When it comes to retirement savings, many people have heard about 401(k) plans. However, not everyone is familiar with the differences between a traditional 401(k) and a Roth 401(k). In this article, we will delve into the world of retirement savings and explore the features and advantages of both options.

To begin our discussion, let’s understand what a 401(k) plan is. It is an employer-sponsored retirement plan that allows employees to save and invest a portion of their salary for retirement while receiving certain tax advantages. Contributions made to a traditional 401(k) are not subject to federal income taxes, meaning your taxable income is reduced by the amount contributed. This can potentially lower your overall tax bill in the year of contribution. However, withdrawals made during retirement are subject to income taxes.

Now, let’s shift our focus to the Roth 401(k). Introduced in 2006, the Roth 401(k) is named after its similarity to the Roth IRA (Individual retirement account). The major difference between a traditional 401(k) and a Roth 401(k) is how contributions are taxed. With a Roth 401(k), contributions are made after-tax, which means the money you contribute has already been taxed. However, the benefit of this approach is that withdrawals made during retirement are tax-free, assuming certain requirements are met.

One of the key advantages of a Roth 401(k) is that it can provide tax-free income during retirement. This feature can be particularly appealing if you anticipate being in a higher income tax bracket in the future or feel that tax rates may increase over time. Additionally, a Roth 401(k) does not require mandatory minimum distributions (RMDs) at age 72, unlike a traditional 401(k), allowing you to potentially leave the money untouched for a longer period.

On the other hand, a traditional 401(k) offers an immediate tax benefit, as contributions are made on a pre-tax basis, lowering your taxable income in the year of contribution. This can be advantageous if you are currently in a higher tax bracket and expect to be in a lower one during retirement. However, withdrawals from a traditional 401(k) during retirement are subject to income taxes, which can impact your overall income.

Choosing between a Roth 401(k) and a traditional 401(k) depends on a variety of factors, including your current tax bracket, expected future tax rates, and personal financial goals. Some individuals choose to contribute to both types of accounts to diversify their tax strategies and provide flexibility in retirement.

It is worth noting that not all employers offer a Roth 401(k) option, so take the time to review your company’s retirement plan and consult with a financial advisor to determine the best approach for your individual circumstances.

In conclusion, while both the traditional 401(k) and the Roth 401(k) offer valuable retirement savings options, understanding the differences between the two is crucial. Whether you prefer the upfront tax benefits of a traditional 401(k) or the potential tax-free income of a Roth 401(k), considering your personal financial situation and long-term goals will help you make an informed decision. Remember, retirement planning is a journey, and selecting the right savings strategy will significantly impact your financial future.