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5 Differences Between Roth and Traditional 401(k)s


5
Pretax vs. Post-tax
Contributing to a Roth 401(k) means you pay more in taxes up front. monkebusinessimages/iStock/Thinkstock
Contributing to a Roth 401(k) means you pay more in taxes up front. monkebusinessimages/iStock/Thinkstock

One of the appealing things about saving for retirement via a traditional 401(k) plan is that you're stashing away pretax dollars. This lowers your overall tax burden. For example, let's say you earn $3,000 per month and your tax rate is 30 percent. If you don't save any money for retirement, you'll pay $900 in taxes each month ($3,000 x .30 = $900). But if you make a $200 contribution to a traditional 401(k), that $200 is subtracted from your gross earnings before taxes are applied. So you'd only pay $840 in taxes ($3,000 - $200 = $2,800; $2,800 x .30 = $840).

Roth 401(k)s work differently. You can only contribute to a Roth 401(k) after your salary has been taxed [source: IRS]. So you'd have to pay the full $900 on your $3,000 monthly salary, then take another $200 and put it into your Roth 401(k). But don't let this automatically sway you from considering one. There are other benefits to these plans that traditional 401(k)s don't offer, as you'll soon learn.

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