With a Roth 401 (k), the main difference is when the IRS makes its contribution. You make Roth 401 (k) contributions with money that has already been taxed, just as you would with a Roth individual retirement account (IRA). All earnings then grow tax-free, and you don’t pay taxes when you start withdrawing money in retirement. The Roth account may be more valuable in retirement.
That’s because when you withdraw a dollar from that account, you can put the entire dollar in your pocket. When you withdraw a dollar from a traditional 401 (k), you can only keep the remaining balance after you’ve paid taxes on the distribution. Yes, as long as you comply with all income limits and restrictions, you can contribute to both types of Roth at the same time. As long as you repay the money to them or another Roth IRA during that period, you’re effectively getting a loan with 0% interest for 60 days.
However, this does not apply to the earnings of a Roth IRA, for which withdrawals before retirement (if you are under 59½ years of age) are still subject to a 10% penalty. The big advantage of a Roth comes into play when you start withdrawing money in retirement and in the following years. If you don’t have access to a Roth option at work, you can still take advantage of Roth benefits (provided you meet income requirements) by working with your investment advisor to open a Roth IRA. The IRS requires Roth IRAs to qualify, which does not exist in the Roth 401 (k) environment.
Contributions to a Roth 401 (k) can put a heavier strain on your budget today, as an after-tax contribution burdens your paycheck more than a pre-tax contribution to a traditional 401 (k). However, if you initiate a Roth IRA rollover, you have 60 days to use that money at 0% interest before depositing it into your new account, essentially a short-term loan. With these two pieces of information, you can clarify whether you should contribute to a traditional 401 (k) or a Roth 401 (k). A third benefit of a Roth 401 (k) account is the ability to borrow money against your account balance.
Even if you expect to leave assets to heirs and you want your heirs to inherit assets tax-free, a Roth may be a better choice. If you’d like to learn more about Roth 401 (k), s compared to traditional 401 (k), s, and other investment options, it’s a good idea to sit down with an investment expert who can help you out. As a result, it doesn’t make sense to contribute to a Roth 401 (k) while you’re in New York City unless you know you’ll retire in an area with a similarly high tax rate.
