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5 Differences Between Roth and Traditional 401(k)s


Which jar should your retirement money go into: traditional 401(k) or Roth 401(k)? Jamie Grill/Getty Images
Which jar should your retirement money go into: traditional 401(k) or Roth 401(k)? Jamie Grill/Getty Images

Most Americans are probably familiar with 401(k) plans, aka "traditional 401(k)s." Created in 1980 by a benefits consultant specifically for his employer, The Johnson Cos., the savings plan allowed workers to sock away money with pretax dollars that were matched by The Johnson Cos. With defined benefit plans (pensions) already on the decline, American employers jumped on the innovative 401(k) plan as a cost-saving alternative. By 2013, nearly 95 percent of private employers were offering these plans to employees [source: Anderson].

The Roth 401(k) was crafted only in 2006, and thus isn't nearly as well-known. It combines features from both the traditional 401(k) and the Roth individual retirement account (IRA). Although Roth 401(k)s are growing in popularity, they're still not used very often. Only 15 percent of retirement plan participants through Charles Schwab use one, for example, although 66 percent of plan sponsors offer the option. At Vanguard Group, the figure is a mere 9 percent, though 46 percent of the companies they work with offer Roth 401(k)s [source: Ensign].

This doesn't mean the product is faulty. Rather, experts say it's difficult for people to determine whether a traditional 401(k) or a Roth 401(k) is right for them. To help you begin figuring this out for yourself, let's take a look at five of their differences.


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