The Roth k was introduced in and was designed to combine features from the traditional k and the Roth IRA. With a Roth account, you can take advantage of the company match on your contributions, if your employer offers one, just like a traditional k.
And the Roth component of a Roth k gives you the benefit of tax-free withdrawals. First, these are both workplace retirement savings options.
With either type of k plan, you can enjoy the convenience of having the contribution drafted out of your paycheck. Second, both can include a company match. Your employer is giving you free money! Third, both types of k s have the same contribution limit. The Roth k includes some of the best features of a k —convenient contribution methods and the possibility of a company match if your employer offers one.
The biggest difference between a traditional k and a Roth k is how the money you contribute is taxed. Taxes can be kind of confusing not to mention a pain to pay! A Roth k is a post-tax retirement savings account. That means your contributions have already been taxed before they enter your Roth account. On the other hand, a traditional k is a pretax savings account.
How do those definitions play out when it comes to your retirement savings? With a Roth k , your money goes in after-tax. When you contribute to a traditional k , your contributions are pretax. You may be wondering why anyone would contribute to a Roth k if it means paying taxes now. But hang with us.
The huge benefit of a Roth is what happens when you start withdrawing money in retirement. The biggest benefit of the Roth k is this: Because you already paid taxes on your contributions, the withdrawals you make in retirement are tax-free. Any employer match in your Roth account will still be taxable in retirement, but the money you put in—and its growth!
No taxes will be taken out when you use that money in retirement. Another slight difference between a Roth and traditional k is your access to the money. A Roth k works well in many cases, but the traditional k is really good in others. Wilson defines a low bracket as being taxed at the federal level of 12 percent or less. It can actually be valuable to not have all your eggs in one retirement basket, even if it does make the most financial sense today.
Exceed certain income thresholds and more of your Social Security check becomes taxable. A mix of accounts can help you avoid this scenario. Both the traditional k and the Roth k have required minimum distributions though there are a handful of exceptions , but the Roth allows you to escape the RMD without any extra taxes.
Because the traditional k gives you a tax break on contributions today, it can make sense to use that break today when your tax costs are high.
However, some subset of employers provide this perk for traditional k plans only — but not Roth k plans, because of how tax laws benefit these traditional plans. If you want to take advantage of the benefits of a traditional k and a Roth k , you can do so.
Or you could alternate years, using the Roth plan one year and the traditional plan the next. That maximum does not include any employer match on your contributions, however. So the match counts as a bonus above and beyond your own personal contributions. The choice between a traditional k and a Roth k can depend on a lot of factors that are specific to your individual financial situation. How We Make Money. James Royal. Written by.
Bankrate senior reporter James F. Royal, Ph. Edited By Brian Beers. Edited by. Brian Beers. Brian Beers is the senior wealth editor at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Reviewed by. Kenneth Chavis IV. Share this page. Bankrate Logo Why you can trust Bankrate. Bankrate Logo Editorial Integrity. Key Principles We value your trust. Many or all of the products featured here are from our partners who compensate us.
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A k is key to many retirement nest eggs, but about half of plan sponsors now offer a second option: a Roth k. A Roth k is a type of k that allows you to make after-tax contributions and then get tax-free withdrawals when you retire. Traditional k s, on the other hand, allow pre-tax contributions and the withdrawals in retirement are taxable.
Use this k calculator to see where you are. Can I contribute to both a k and a Roth k? Most employers that offer both a Roth k and a traditional k will let you switch back and forth between them or even split your contributions.
Employers may even match Roth k contributions. In fact, if your employer offers matching dollars and you contribute to a Roth k , you'll also have a traditional k because the matching amount must go into a pretax account. That will let you better manage your taxable income. It features:. There is no income limit for a Roth k. It can be hard to turn your back on those attributes, but is a Roth k suitable for you?
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