Roth 401(k) vs. Traditional 401(k) What’s the Difference?

October 30, 2023

When it comes to retirement savings, it’s good to have options. In the following guide, we cover the key features of a Roth 401(k), explain how it’s different from a traditional 401(k), and point out which one we recommend. Keep reading to learn more.

What is a Roth 401(k)?

A Roth 401(k) is a retirement savings plan in which you make contributions with after-tax money. Earnings in a Roth 401(k) grow tax-free, and qualified withdrawals in retirement are also tax-free. Roth 401(k)s are offered by some employers to their employees.

You may be wondering what makes Roth 401(k)s different from Roth IRAs. While these accounts have similar names, there are key differences between them. A Roth 401(k), for example, is an employer-sponsored retirement plan, whereas a Roth IRA is not employer-sponsored. In addition, Roth 401(k)s have no income limits for participants, while Roth IRAs do. Furthermore, Roth 401(k)s have larger annual contribution limits than Roth IRAs do. For these reasons, Roth 401(k)s are often the more desirable option for high-earners.

Let’s take a look at some of the specific features of a Roth 401(k) plan:

  • Taxes – Contributions are after-tax, earnings grow tax-free, and qualified withdrawals in retirement are not taxed.
  • Salary deferral limits – For 2023, the salary deferral limit is $22,500 (or $30,000 if you’re age 50 or older)
  • Total contribution limits – For 2023, total contribution limits, which include the salary deferral amount and employer matches is $66,000 (or $73,500 if you’re age 50 or older)
  • Catch-up contribution limit – For 2023, the catch-up contribution limit for Roth 401(k)s is $7,500.
  • Income limit – For 2023, there is no income limit for Roth 401(k)s.
  • Required Minimum Distributions (RMDs) – For 2023, RMDs are required if you’re age 73 or older, but will no longer be required in 2024 due to changes made by the SECURE Act 2.0.

How is a Roth 401(k) different from a traditional 401(k)?

The main difference between a Roth 401(k) and a traditional 401(k) is when you pay taxes on the money. With a Roth 401(k), you contribute money after you pay taxes. The money grows tax-free, and you also make qualified withdrawals tax-free. With a traditional 401(k), you contribute tax-deferred money. When you withdraw the money, you pay taxes on each withdrawal, including on the growth and employer contributions.

For 2023, both Roth 401(k)s and traditional 401(k)s have the same contribution limits.

Which type of 401(k) plan is better?

So, which 401(k) plan is better?

Both are good options, but the financial advantages of a Roth 401(k) make it a superior retirement savings plan, in our professional opinion.

Let’s take a look at the unique financial advantages afforded by a Roth 401(k):

  • ✅ Up-front tax contributions mean tax-free growth and tax-free qualified withdrawals in retirement.
  • ✅ Retirement savings are protected from future adjustments to the tax brackets since you’ve already paid taxes on them.
  • ✅ You will have access to more of your nest egg.
  • ✅ Your retirement savings will last longer because you already paid taxes on them.
  • ✅ You can still take advantage of employer matches on your contributions to your Roth 401(k).

Choosing a Roth 401(k) is a great strategy for your retirement savings. You may also be able to convert your traditional 401(k) into a Roth 401(k). The experts at Honest Buck are here to answer all your questions when it comes to the right retirement savings plan for you.

Contact us today!

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