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Retirement Planning

How is a Roth 401(k) different from a traditional 401(k) Plan?

Today, pension plans are rare and with that 401(k) plans have become a critical component for most retirement plans.

With more employers doing away with pension plans, the 401(k) plan has become a vital retirement planning tool. But how do you choose between a Roth 401(k) and a traditional 401(k) plan if your employer offers you both, or if you’re simply trying to decide on your own if one is better than the other? Here’s what you need to know.

The main difference between the two retirement savings accounts are the way they are taxed. With a traditional 401(k) plan, the money you put into your account (your contributions), are made with pre-taxed dollars. Simply put, your employer takes money out of your paycheck before taxes, allowing you to reduce your taxable income and lower your taxes in the year that you contribute. Your contributions and any earnings in your account won’t be taxed until you begin to withdraw your money (typically in retirement), and you’ll pay taxes on both based on the then-current rate.

Traditional 401(k) = income taxes paid on withdrawals from your account

With a Roth 401(k) plan, the contributions you make to your account are made after your employer withholds taxes. Because you have already paid taxes on your contributions, you won’t owe taxes on contributions or earnings when it comes time to withdraw your money – again, typically in retirement. However, it’s important to note that if your employer offers a company match on your Roth 401(k), that money is made with pre-taxed dollars. This means that the money your employer contributes, as well as any associated earnings you may accumulate, will be subject to regular income tax when it’s withdrawn. Furthermore, the IRS has established criteria for what constitutes a "qualified withdrawal," which are tax-free disbursements.

Roth 401(k) = income taxes on paid on contributions to your account

Whichever 401(k) plan you choose, it’s always a good idea to have a mix of retirement accounts so that your money is tax-diversified. Simply put, this means having both tax-deferred accounts that you won’t have to pay taxes on until you retire, as well as accounts that have already settled up their tax bill.

For more information on 401(k) plans, as well as other ways to save for retirement, visit Protective’s Learning Center.

 

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401k Plan
With more employers doing away with pension plans, the 401(k) plan has become a vital retirement planning tool. But how do you choose between a Roth 401(k) and a traditional 401(k) plan if your employer offers you both, or if you're simply trying to decide on your own if one is better than the other? Here's what you need to know about these two types of 401(k) plans. For more information, visit our learning center.
 
All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective or its subsidiaries.

Learning Center articles may describe services and financial products not offered by Protective or its subsidiaries. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective or its subsidiaries.

Neither Protective nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax-related decisions. For information about Protective and its products and services, visit www.protective.com.

Companies and organizations linked from Learning Center articles have no affiliation with Protective or its subsidiaries.