Roth 401(k)s

Roth 401(k)

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Roth 401(k)

The primary difference between a Roth 401(k) and a traditional 401(k) is that, in a Roth 401(k), employee contributions are made after taxes, so when employees withdraw funds at the time of retirement, they will not be taxed. In addition, Roth 401(k) plans are not subject to required minimum distributions (RMDs), the annual withdrawals that one must take when they reach age 70 ½. While many employers may choose to offer their employees the ability to make Roth contributions in addition to traditional contributions, they don’t necessarily have to offer a Roth contribution plan. While it is possible to make sole contributions to a traditional or Roth 401(k), an employee may also elect to make both traditional and Roth contributions to his or her 401(k) if both contribution types are offered. Like the traditional 401(k), employer-matching contributions are a common feature of Roth 401(k) plans. However, even if the match is for Roth contributions, employer contributions are always of traditional 401(k) nature in that they are made with pre-tax dollars. Employer contributions are kept in a separate account that is taxed upon withdrawal.

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