Do you have the Roth 401(k) option available to you? If so, it may be worth looking into. The following table compares the features of a Roth 401(k) to those of a traditional 401(k).
Traditional 401(k) Roth 401(k)
Annual contribution limit $16,500 ($22,000 for participants age 50 and above) $16,500 ($22,000 for participants age 50 and above)
Matching contributions Allowed. May be combined with employee contributions Deposited separately in a Traditional 401(k) account. Taxed when withdrawn
Tax status – employee contributions Made with pre-tax dollars; deductible from current income Made with after-tax dollars; not deductible from current income
Tax status – withdrawals after age 59½ Taxable as ordinary income Not taxable
Mandatory withdrawals Required minimum distributions start at age 70½ Required minimum distributions start at age 70½
Best for
Employees who need the current tax deduction, who will make withdrawals within five years, or who will be in same or lower tax bracket in retirement Employees who do not need the current tax deduction, who will not make withdrawals for five years or more, or who will be in higher tax bracket in retirement
Concerns All growth in the account, including capital gains on equity investments that would qualify for favorable capital-gains treatment if earned outside a retirement account, are taxed at ordinary income rates If tax rates decline, early payment of taxes will have been counter-productive; requires giving up more current income to maximize employer match
