Is a Traditional 401(k) or a Roth 401(k) Better for Retirement?
If you've ever read your company's retirement plan document, it's likely you've come across a variety of retirement account options. The real question, however, is if you've taken the time to truly understand the implications of funding these different accounts.
The most well-known employer-sponsored retirement account is simply tabbed a "401(k)," but there are major differences between a pre-tax, or traditional 401(k), and a Roth 401(k) -- both of which are likely offered at your company. A Roth account -- whether it's a 401(k) or IRA -- contains after-tax money and offers tax-free growth. The aim of this article is not to necessarily drive you to invest in one or the other, but to provide a foundation to make best funding decision given your personal circumstances.
The most common 401(k) is traditional. Money contributed into this sort of account is taken pre-tax from your gross earnings. The result is that you make your retirement contribution before tax is charged, which leads to a lower tax bill today. The theory here is that by reducing tax today when your tax rate is likely medium-to-high (while you're employed), you'll probably pay less tax when you actually draw from the account in retirement, when your tax rate may be lower.
Source Fool.com
