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What’s the difference between a traditional and roth 401(k)?

By SVIC Editorial Board

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    There are two main types of 401(k)s – the Roth 401(k) and the traditional 401(k). Both have their own pros and cons, and it’s important to understand the difference between them before you make a decision about which one is right for you. This post will explain the differences between a Roth 401(k) and a traditional 401(k) and the common mistakes people make with them.

    Differences between Roth 401k and a traditional 401(k)

    The biggest difference between a Roth 401(k) and a traditional 401(k) is the way that they are taxed. With a traditional 401(k), you contribute pre-tax dollars, which means that you don’t have to pay taxes on them until you withdraw the money in retirement. With a Roth 401(k), you contribute after-tax dollars, which means that you’ve already paid taxes on them and you won’t have to pay taxes again when you withdraw the money in retirement.

    Another difference between the two types of 401(k)s is the way that they grow. With a traditional 401(k), your money grows tax-deferred, which means that you won’t have to pay taxes on it until you withdraw it in retirement. With a Roth 401(k), your money grows tax-free, which means that you never have to pay taxes on it, even when you withdraw it in retirement.

    Choosing which 401(k) works best for you

    So, which one should you choose? It really depends on your personal financial situation. If you think you’re in a higher tax bracket now than you will be in retirement, then a traditional 401(k) might be a better choice for you. If you think you’re in a lower tax bracket now than you will be in retirement, then a Roth 401(k) might be a better choice for you.

    There are also a few other factors to consider, such as whether you want the flexibility to withdraw your money early (with a Roth 401(k), you can do this without paying any penalties) or whether you want to leave your money to your heirs (with a traditional 401(k), your heirs will have to pay taxes on the money when they inherit it).

    Ultimately, there is no right or wrong answer when it comes to choosing between a Roth 401(k) and a traditional 401(k). It’s just important to make sure that you understand the difference between the two and how it will impact your taxes in retirement.

    Avoid these 401(k) mistakes

    One of the most common mistakes people make with their 401(k)s is not contributing enough to get the full employer match. If your employer offers a match, ensure you’re contributing enough to get the full amount. Otherwise, you’re leaving free money on the table!

    Another common mistake is not diversifying your investments. When you have a 401(k), you can invest in various asset classes, including stocks, bonds, and mutual funds. However, many people just choose to invest in one or two of these asset classes, which can lead to big losses if one of them dives. Make sure you diversify your investments to help protect yourself from market volatility.

    Summing our conversation up

    The bottom line is that a 401(k) can be a great way to save for retirement, but it’s important to make sure you’re doing it the right way. Consider your options carefully and make sure you’re contributing enough to get the most out of your 401(k).

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