Roth 401k vs. Traditional and Roth IRAs

How does the Roth 401k compare with the Traditional IRA and Roth IRA? What are the advantages of a Roth 401k for my sweet shop employees? – Haydee J. Fries, Delafield, WI 

The Roth 401k is a very useful plan for an employer to offer his employees to ensure their future financial security. It was introduced fairly recently in the year 2006. When compared with the Roth IRA, both plans have several similarities. In both these savings plans, the contributions are made with after- tax dollars. That is, your employee makes his contributions into this account after paying tax on his paycheck. Because it is taxed at this time, the employee gets to withdraw funds from the account tax free in future. This is especially advantageous to those employees who stand a good chance of falling within a much higher tax bracket at retirement time. They pay less tax now on the contribution to avoid paying taxes on the same funds at a higher rate later.

In contrast, contributions to a traditional IRA are made with pre tax dollars. A part of the employee’s paycheck is directly credited into the traditional IRA before he pays tax on the rest. Since he has not paid tax on the funds in this account at the time of making the contribution, tax is charged at withdrawal time. For those who will have very little income post retirement, this could be quite advantageous. But since it is impossible to predict what your financial status will be at retirement time, many employees prefer the Roth version of the 401k where they can simply pay the tax right now when they have a regular income instead of worrying about it later.

You can read more about these plans and also compare a few 401k suites at http://401k-network.com/. Use a ready to use software suite like the ones listed here to make the set up and administration of your Roth 401k plan easy.

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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