Like HowStuffWorks on Facebook!

5 Differences Between Roth and Traditional 401(k)s


4
Take-home Pay
Your take-home pay is less with a Roth 401(k). Ingram Publishing/Thinkstock
Your take-home pay is less with a Roth 401(k). Ingram Publishing/Thinkstock

Another advantage traditional 401(k) owners enjoy is that contributing to a traditional 401(k) means a fatter paycheck, while using a Roth 401(k) results in a slimmer one. Using the previous example of a $3,000 monthly salary, 30 percent tax bracket and $200 monthly 401(k) contribution, here's how the math works. With a traditional 401(k), your $200 contribution will first be subtracted from your gross monthly earnings: $3,000 - $200 = $2,800. Next, your remaining salary will be taxed: $2,800 x .30 = $840. When you subtract your taxes owed ($840) from your remaining salary ($2,800), you wind up with a monthly take-home pay of $1,960.

If you select a Roth 401(k), however, you'll have a slightly smaller paycheck each month since your taxes will be computed based on your gross salary, not your post-401(k)-contribution salary ($3,000 x .30 = $900). Next, your taxes will be removed from your salary: $3,000 - $900 = $2,100. Now you'll be able to make your $200 401(k) contribution: $2,100 - $200 = $1,900. That $1,900 paycheck is $60 less than what you'd receive if you were funding a traditional 401(k).

What do you do with that extra $60 you have through the traditional 401(k)? If you invest it, you're adding even more to your retirement pot. But if you're like most people you probably spend it. In that case, the Roth 401(k) might actually be more beneficial because that extra money is being captured and allowed to grow. Potentially you might have a higher amount of money to withdraw at retirement time than with a 401(k) [source: Fidelity].

Finance Planning Tips

Here are some tips to help you with generating income and planning for the future.

Presented by United Way of Greater Atlanta Powered by SunTrust Foundation


More to Explore