When it comes to choosing a retirement plan, you may have heard about both Roth 401k and traditional 401k. They are both employer-sponsored retirement plans, but the main difference is in the way they are taxed. Choosing the right plan for you can be a daunting task, but it is important to make an informed decision. In this article, Bill Schantz will take a closer look at both plans and help you decide whether you should choose a Roth 401k or a regular 401k.
Should You Choose a Roth 401k Or a Regular 401k? Bill Schantz Answers
Roth 401k vs. Traditional 401k
The traditional 401k is a pre-tax retirement account, meaning that the contributions you make are taken out of your pre-tax income, says Bill Schantz. This lowers your taxable income, which can help you save money on taxes today. The money you contribute grows tax-deferred until you withdraw it in retirement. When you withdraw your money, you will pay taxes at your regular income tax rate, including both the contributions you made and the growth.
The Roth 401k, on the other hand, is an after-tax retirement account. This means that the contributions you make are taken out of your post-tax income. You will not benefit from any tax deduction today, but your money will grow tax-free. This means that when you withdraw your money in retirement, you will not pay taxes on your contributions or growth.
One of the main benefits of a Roth 401k is that it allows you to take advantage of tax-free growth. This is especially beneficial for younger investors who have a longer time horizon for their investments to grow. Since you are contributing after-tax dollars, the contributions themselves are not tax-deductible. However, all the earnings that accumulate over time can be withdrawn tax-free in retirement. In contrast, a traditional 401k allows you to lower your taxable income, which can be an advantage if you are in a higher tax bracket today than you expect to be in retirement.
Another advantage of a Roth 401k is that there are no required minimum distributions (RMDs). With a traditional 401k, you are required to take RMDs once you turn 72 years old, even if you do not need the money. However, with a Roth 401k, you can let your money grow tax-free for as long as you want, and you will never be required to take any distributions.
Which One is Right for You?
Deciding which plan is right for you will depend on your individual circumstances. If you expect to be in a higher tax bracket in the future, a Roth 401k may be the better choice. Since you are contributing after-tax dollars, you can avoid paying taxes on your growth in the future. Additionally, if you anticipate needing to withdraw more than the RMDs in retirement, a Roth 401k may be a better option. This is because you will not be required to take any distributions, allowing your money to continue growing tax-free.
On the other hand, if you are in a high tax bracket today, a traditional 401k may be a better choice. According to Bill Schantz, by contributing pre-tax dollars, you can lower your taxable income, reducing the amount you owe in taxes today. Additionally, if you anticipate being in a lower tax bracket in retirement, you may benefit from paying taxes at a lower rate.
Bill Schantz’s Concluding Thoughts
In conclusion, both Roth 401k and traditional 401k have their advantages and disadvantages. Choosing the right plan for you will depend on your individual circumstances and financial goals. If you are unsure which plan to choose, it is always wise to consult with a financial advisor. According to Bill Schantz, by taking the time to understand your options and making an informed decision, you can ensure that you are on the right track toward a comfortable retirement.