Understanding the Difference Between a 401(k) and a Roth 401(k)
- A 401(k) uses pre-tax contributions, offering immediate tax savings and tax-deferred growth until retirement.
- A Roth 401(k) is funded with after-tax dollars, allowing tax-free withdrawals in retirement.
- Offering both 401(k) vs Roth 401(k) options provides employees flexibility to match their financial goals and tax preferences.
- TRA helps businesses design retirement plans that attract talent, offering expertise in both 401(k) and Roth 401(k) options.
When it comes to saving for retirement, choosing between a 401(k) vs Roth 401(k) can be crucial. While both plans offer tax advantages, they differ in how contributions and withdrawals are taxed, impacting how employees grow and access their retirement savings.
How Does a Traditional 401(k) Work?
A traditional 401(k) plan is funded with pre-tax dollars, meaning contributions lower an employee’s taxable income for the year. The savings grow tax-deferred, and taxes are only paid when funds are withdrawn in retirement. This option is often appealing for employees who expect to be in a lower tax bracket after they retire, as it allows for immediate tax savings.
What Makes a Roth 401(k) Different?
The Roth 401(k) is funded with after-tax dollars, so contributions are taxed upfront. However, qualified withdrawals in retirement are tax-free, offering employees tax-free income later in life. This plan can be especially beneficial for individuals expecting to be in a higher tax bracket upon retirement or for those looking for flexibility, as Roth 401(k) contributions allow for certain tax-free early withdrawals under specific conditions.
Which Plan Is Right for Your Employees?
Offering both a 401(k) vs Roth 401(k) as part of a company’s retirement plan provides employees with options that can match their personal financial goals. Whether employees prefer immediate tax savings with a traditional 401(k) or tax-free income in retirement with a Roth 401(k), having choices can enhance a benefits package and attract top talent.
How TRA Can Help
The Retirement Advantage, Inc. (TRA) specializes in designing and administering retirement plans that align with each business’s unique needs. From third-party administration (TPA) to fiduciary support, TRA simplifies the process of offering competitive, compliant retirement options.
Contact TRA today to explore retirement plan options that fit your business. Our team can help you decide whether a 401(k), Roth 401(k), or both is best suited for your employees, providing guidance every step of the way.
