Youth is also a big advantage, allowing money to grow tax-free even longer. Just realize that everyone has an opinion about everything. The Roth 401(k) contribution limits are the same as the contribution limits of a traditional 401(k). Yes, this answer is simple, but it ain’t easy. However, if you do expect some variation in your income tax rate, then we can simplify the decision. For example, in 2012, I was under the impression that U.S. federal income tax rates were likely to increase in the future to be somewhat closer to that of their European counterparts. Note that by law any employer matching contributions must be … For those with less familiarity, a “traditional “ 401 (k) is funded with pre-tax money while a Roth 401 (k) is funded with post-tax money. As of January 2006, there is a new type of 401 (k) contribution. This is why it probably doesn’t make sense to contribute to a Roth 401(k) while living in New York City unless you know that you are going to retire in an area with a similarly high taxes. Traditional 401k. Many 401k plans now offer a Roth 401k. The question about which 401(k) plan is better depends so much on your individual situation. Both Kate and Kevin end up with $210 in retirement spending because they had the same contributions, the same investment growth, and paid the same tax rates over time. 1. When making Traditional contributions, you get an upfront tax benefit because your taxable income is reduced by the amount you contribute. When you leave a job, you can rollover your 401k into an IRA at the investment account of your choosing. A profit sharing contribution of up to 25% of compensation can also be made into an Individual 401k. The question about which 401(k) plan is better depends so much on your individual situation. In a Roth 401(k) vs. Roth IRA comparison, both offer tax-free growth & tax-free retirement income. Trust me on this. "Considering the massive debt we already have, plus the trillions of dollars the government is spending to help its citizens through the COVID-19 crisis, it is likely in the future tax rates will be higher.". Wilson defines a low bracket as being taxed at the federal level of 12 percent or less. In fact, many of you that do a Roth 401(k) will automatically have a traditional 401(k) component if your employer does any sort of contribution matching. If you've already funded a traditional 401(k), it can make sense to add a Roth plan to the mix. Sally placed more total dollars into the tax-deferred account to begin with. California) and you plan on retiring in a state with low income taxes later (i.e. I understand this complicates the calculus surrounding your retirement contributions, but it is worth noting. However, since the maximum yearly contribution amount into a traditional 401(k) is $19,500, Sam is out of luck. Traditional 401 (k) and your Paycheck A 401 (k) can be an effective retirement tool. A Roth 401(k) works well in many cases, but the traditional 401(k) is really good in others. Individual Roth 401k salary deferral contributions are not tax deductible, but withdrawals are tax free after age 59 ½ provided the 5 year rule is satisfied. Withdrawal rul… With a Roth 401(k) you'll make contributions with after-tax money, so you won't enjoy a tax break today. A traditional 401(k) is the original version of the plan, and is usually referred to simply as a 401(k). Distributions. In that case, using a traditional 401(k) would be preferred as the expected savings in state income tax today are likely to exceed the expected increase in federal income taxes in the future. 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