Let’s face it – everyone’s worried about their retirement. How does one go about saving enough money to last for decades? Is it even possible to garner that much wealth working a normal 9-to-5 job? To think about inflation, no less. These are all worries that eat up the common man from within. But luckily, there are a couple of powerful tools that come to your aid when you’re looking to build your wealth. One of these tools is the Roth 401(k).
What’s the Roth 401 (k)?
Albeit less popular than its traditional counterparts, this retirement plan is offered by employers. Compared to the individual retirement account, the Roth 401 (k) demands equal contributions from both employer and employee, allowing for a higher contribution than traditional plans. This year, the Roth 401 (k) contribution limit for people aged 50 or above is $26,000, and $19,500 for those younger than 50.
Difference Between Roth IRA and Roth 401(k)
Don’t confuse the Roth 401 (k) with the Roth IRAs though. The former requires you to start minimum withdrawals by age 72. Additionally, there’s a difference when it comes to income limits. Roth 401(k) has no income restrictions, while Roth IRA contributors are subject to income phaseouts.
Difference Between Tradition 401(k) and Roth 401(k)
The difference between these two plans falls in the method by which they’re taxed. In a traditional plan, funds are submitted in pre-tax dollars and tax is applicable when the account holder withdraws funds from their account. In a Roth 401(k) account, on the other hand, funds are contributed after-tax, meaning that you can withdraw them tax-free when the time comes.
When is Roth Most Useful?
Business owners who had a bad year, people with lower income levels than usual, people transitioning between careers, and those who fall in the lower tax brackets should definitely opt for Roth accounts. Additionally, since money grows tax-free in Roth accounts, they are most suitable for people anticipating a higher tax bracket when the time from withdrawal comes around. Once the account holder crosses the age of 59 ½, they can withdraw their gains penalty-free.
Who Shouldn’t Get the Roth 401(k)?
Roth accounts are not for everyone. Insight Financial Strategists’ chief investment officer and certified financial planner Chris Chen comments that they are all about “tax play”. If you’re anticipating the tax rate to be lower than or equal to the current tax at the time of your retirement, it’s best to steer clear of Roth accounts.