Home » Insights » Retirement » Roth 401(k) vs. Traditional 401(k): Understanding the Differences
Choosing between a Traditional or Roth 401(k) contribution can be a difficult decision when given the choice. Key considerations include when you prefer to pay taxes, immediate tax benefits, withdrawal strategies, and retirement goals.
Saving for retirement is a crucial aspect of financial planning, and employer-sponsored retirement plans, such as the 401(k), offer a valuable opportunity to build a nest egg for your future. When participating in a 401(k) plan, a major decision, if your employer offers it, is whether to contribute to a Roth 401(k) or a Traditional 401(k).
The key difference has to do with taxes. A Roth 401(k) is a post-tax retirement savings account. That means your contributions have already been taxed before they go into your Roth account. In retirement, distributions from the Roth 401(k) are largely tax free. On the other hand, a Traditional 401(k) is a pretax savings account, meaning your contributions go in before they’re taxed making your taxable income lower. However, in retirement distributions from the Traditional 401(k) are taxable as ordinary income. Once you consider when you want your investments to be taxed, you can decide which option is right for you and your retirement savings strategy.
Roth 401(k) Basics
The Roth 401(k) was introduced in 2006 and combines features from the traditional 401(k) and a Roth IRA. If your employer offers a Roth 401(k), you can make after-tax contributions that grow to be tax free if withdrawn after age 59 ½, upon disability, or because of the owner’s death. Prior to 2023, the employer match or profit-sharing contributions are funded into the traditional 401(k) and subject to tax at distribution. However, the SECURE 2.0 Act allows employees to elect Roth treatment of the employer contributions starting in 2023. This causes those employer dollars to be taxable immediately to the employee but those amounts, and all growth can be withdrawn tax free in retirement. Key features of the Roth 401(K) include:
Traditional 401(k) Basics
The Traditional 401(k) has been a staple retirement savings vehicle for many years. Key features of the Traditional 401(k) include:
When deciding between a Roth 401(k) and a Traditional 401(k), several factors should be considered to find which better aligns with your goals for retirement.
Choosing between a Roth 401(k) and a Traditional 401(k) involves weighing the current and future tax implications, considering your retirement income needs, and understanding the nuances of each option. It’s often beneficial to diversify your retirement savings by utilizing both types of accounts if your employer provides the option. Ultimately, consulting with a financial advisor can help you tailor a retirement savings strategy that aligns with your unique financial goals and circumstances. Contact one of our advisors to learn more.
Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.
Learn more about connecting the dots of your financial life.
All investing involves risk, including the possible loss of principal. Portfolio management strategies such as diversification, asset allocation, and rebalancing do not ensure a profit or guarantee against loss. There is no guarantee that any investment strategy will achieve its objectives. Mercer Advisors is not a law firm and does not provide legal advice to clients. All estate planning document preparation and other legal advice are provided through select third parties unrelated to Mercer Advisors. Mercer Advisors Inc. is a Delaware corporation and is in no way affiliated with Mercer LLC, Mercer Investments, or the Marsh & McLennan Companies. Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Terms & Conditions | Privacy and Security Center | Firm Brochure Adv Part 2A | Form CRS.
©2024 Mercer Global Advisors Inc. All rights reserved.