Like all financial decisions, retirement planning should be tailored to your interests, resources and needs. With pensions at a premium and the future of Social Security increasingly uncertain, many are turning to the most common types of retirement savings plans: 401(k) plans and individual retirement accounts (IRAs).
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For personal finance guru Dave Ramsey, one retirement account stands out from the rest. Ramsey suggested contributing to a company-managed 401(k), but not necessarily the traditional version. “We always recommend a Roth option if your plan offers one,” Ramsey said.
Roth 401(k)s are a new type of retirement savings plan. Established in 2001 through the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), Roth 401(k)s combine the best of Roth IRAs and 401(k)s. Here are some interesting differences between Roth 401(k)s and their IRAs and other 401(k)s.
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When offered, an employer-sponsored 401(k) retirement plan is one of the best ways to create a financially secure life after work. Among the many benefits of participating in a 401(k) plan are tax deferrals on contributions and earnings until you roll them over (lowering your tax bill) and taking advantage of employer matching contributions. For many, the Roth version of a 401(k) may prove to be a better alternative to a traditional 401(k) account.
Contribution limits for both Roth and traditional 401(k) plans are the same: $23,000 in 2024, up slightly from $22,500 in 2023. However, the difference between the two types of 401(k)s is that the employee chooses to contribute to the traditional 401(k) )s are created with pre-tax dollars while Roth 401(k)s are funded with after-tax dollars tax, allowing you to withdraw your savings tax-free when you reach retirement age.
Depending on how you want to contribute — whether you want to pay taxes now or later — and what you think your tax rate will be in the future, a Roth 401(k) can be a good choice for some working people. Although your payout will be smaller than if you were participating in a traditional 401(k) plan, when you retire, all the money you contributed will be yours, without any tax liability.
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Similarly, Roth 401(k)s have the same characteristics and differences as Roth IRAs. Both Roth investment opportunities are made with after-tax dollars, so when it’s time to take required distributions (RMDs), you can do so without paying taxes or penalties.