Roth 401k vs Traditional 401K

Which one is better for my business- the Roth 401K or the traditional 401K? What tax advantages do participants get with each?- Avis Charlebois, runs a florist shop in Boise, Idaho.

The 401K plan is one that is designed to offer the best possible savings options for a retired life for you and your employees. As different people have different kinds of investment needs, there are also variations of 401K plans for you to adopt. There is one main aspect to keep in mind when you are comparing the advantages of a traditional 401K with those of a Roth 401K plan.

A traditional 401K plan is built up using pre tax dollars. That is, you withhold a pre determined portion of each employee’s pay check before tax and divert this portion to the traditional 401K plan. As tax is not paid on these earnings at this time, they are taxable when the employee withdraws them in the future. The idea is that the employee may have retired and have low income at the time when he needs to withdraw funds from the traditional 401K. So he may fall within a lower tax bracket as well.

Contributions to a Roth 401K are made with taxed dollars when your employee feels that he may be in a higher tax bracket at withdrawal time. As the contributions are already taxed, withdrawals are completely tax free. However, a Roth can be offered only as a part of a traditional plan.

This difference in tax treatment is the main factor to keep in mind when comparing Roths with Traditional 401Ks. For more information on 401K basics you can look up sites like http://www.doityourself401k.com/ before you make your final decision.

About Elliot Earl, Director, Pension Trade Association
Director, Pension Trade Association Founded in 1982, the Pension Trade Association [California Domestic Nonprofit Corporation #C1629080] is dedicated to helping workers save for their retirement through expanded coverage of 401k -type defined contribution pension plans.

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