What type of 401k is right for me

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.

With a Roth k , you can start withdrawing money without penalty at the same age, but you also must have held the account for five years. The most important part of wealth building is consistent saving every month , no matter what the market is doing. But if choosing between a traditional k and a Roth k , we'd go with the Roth every time! We are an independent, advertising-supported comparison service.

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A close cousin of the traditional k , the Roth k takes the tax treatment of a Roth IRA and applies it to your workplace plan: Contributions come out of your paycheck after taxes, but distributions in retirement are tax-free.

That means you duck paying taxes on investment growth. About half of employers now offer the Roth k alongside the traditional version. If yours does, should you snub the status quo? You can contribute to both accounts in the same year, as long as you keep your total contributions under that cap.

Where the Roth k and the traditional k differ is how contributions and distributions are taxed. Contributions are made pre-tax, which reduces your current adjusted gross income. Contributions are made after taxes, with no effect on current adjusted gross income.

Employer matching dollars must go into a pre-tax account and are taxed when distributed. Distributions in retirement are taxed as ordinary income. No taxes on qualified distributions in retirement. Withdrawals of contributions and earnings are taxed. Withdrawals of contributions and earnings are not taxed as long as the distribution is considered qualified by the IRS: The account has been held for five years or more and the distribution is:.