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Roth 401(k) Versus Traditional 401(k): The Choice Is Not So Obvious

Roth 401(k) Versus Traditional 401(k)What are the benefits to the Roth 401(k) versus traditional 401(k)? Some suggest that it is a great deal for younger workers. The truth is, if at all, the benefit will be different for everyone and it’s a bit of a gamble.

The Roth 401k is a product of a Bush Administration legislation package, authorized by Congress under the Internal Revenue Code, section 402(A). It is a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001. The Roth 401(k) is a type of retirement plan that is a combination of a Roth IRA and a traditional 401(k). Since January 1, 2006 employers have been authorized to allow employees to elect Roth-type treatment for their retirement contributions. It is also available to other plans such as 403(b).

In a Roth 401(k), employees may contribute post-tax dollars to their retirement plans, in addition to or instead of tax-deferred contributions to a company-sponsored retirement plan. So taxes are paid up-front and distributions are collected tax-free later in retirement. However, if an employee receives a company match on a Roth contribution, the company match is a pre-tax contribution.

The Roth 401(k) can make sense for younger career professionals who are in a lower tax bracket at the beginning of their careers, earning less money according to a report by US News. In a traditional 401(k) retirement plan, the idea is to defer taxes on contributions and capital growth until retirement when income tends to be lowest. Prevailing wisdom suggests that the accumulation of contributions and capital appreciation tax-deferred would result in the largest accumulation of capital.

So why would anyone choose a Roth 401(k) instead of a traditional 401(k)? That answer cannot be determined without first looking into your personal crystal ball and making a decision about your future tax scenario. Employing a Roth 401(k) will benefit an individual who anticipates being in a higher a higher tax in retirement than they are while contributing to their Roth 401(k). There are comparison calculators (Roth 401(k) versus Traditional 401(k)) available to participants and to Plan Sponsors that can help individuals choose one versus the other.

So which is better choice in Roth 401(k) Versus Traditional 401(k)? A Roth 401(k) is better if you are in a lower tax bracket while making contribution than you are when taking distributions in retirement.

Timothy Kelly
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Timothy Kelly

Tim Kelly is the Founder of ForexTV. Since its inception in 2003, ForexTV has been a global leader in forex news and has expanded its news coverage to multiple industries. ForexTV is now one of the most recognized brands in global financial news. Mr. Kelly was also the creator and co-founder of 401kTV where he served as Managing Editor until April 2017.

Mr. Kelly is an expert in online marketing, search engine optimization, content development and content distribution. He has consulted some of the top brokerages, media companies and financial exchanges on online marketing and content management including: The New York Board of Trade, Chicago Board Options Exchange, International Business Times, Briefing.com, Bloomberg and Bridge Information Systems and 401kTV.

He continues to be a regular market analyst and writer for ForexTV.com. He holds a Series 3 and Series 34 CFTC registration and formerly was a Commodities Trading Advisor (CTA). Tim is also an expert and specialist in Ichimoku technical analysis. He was also a licensed Property & Casualty; Life, Accident & Health Insurance Producer in New York State.

In addition to writing about the financial markets, Mr. Kelly writes extensively about online marketing and content marketing.

Mr. Kelly attended Boston College where he studied English Literature and Economics, and also attended the University of Siena, Italy where he studied studio art.

Mr. Kelly has been a decades-long community volunteer in his hometown of Long Island where he established the community assistance foundation, Kelly's Heroes. He has also been a coach of Youth Lacrosse for over 10 years. Prior to volunteering in youth sports, Mr. Kelly was involved in the Inner City Scholarship program administered by the Archdiocese of New York.

Before creating ForexTV, Mr, Kelly was Sr. VP Global Marketing for Bridge Information Systems, the world’s second largest financial market data vendor. Prior to Bridge, Mr. Kelly was a team leader of Media at Bloomberg Financial Markets, where he created Bloomberg Personal Magazine with an initial circulation of over 7 million copies monthly.
Timothy Kelly
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