Human Interest - The 401(k) provider for small and medium-sized businesses

Roth 401(k) vs. 401(k): Which Is Right For You?

By The Human Interest Team -

Getting started with a 401(k) can seem difficult at first, but knowing what your options are will help you make the right decision. Luckily, it’s become even easier to choose a 401(k) plan, as recent research shows that 42% of employers reduced the number of investment options they offered participants over the past three years, and another 41% plan to do so by 2020. This means that employers have been consolidating and streamlining the options they’re providing to participants, giving you clearer access to the best retirement savings options for your needs.

About the Roth 401(k)

First introduced in 2006, the purpose of the Roth 401(k) was to mix features of the Roth IRA with those of traditional 401(k) plans. Contributing to any 401(k) plan means that your company can match your contribution. Adding the Roth component means that you avoid paying taxes on future withdrawals. This makes it a suitable plan for those who estimate that their overall income will significantly increase over time and choose to pay taxes on their current income, as opposed to paying taxes on their projected higher income.

Notable differences between a Roth IRA and a Roth 401(k) are:

What are the Main Differences Between a Roth 401(k) and a Traditional 401(k)?

Both the traditional 401(k)s and Roth 401(k) plans are similar, as they are employer-sponsored retirement savings plans that provide tax advantages to employees who make contributions by saving a portion of their paycheck for retirement. 

The two plans also differ in the way contributions and withdrawals are being taxed. The three main differences are:

How the Roth 401(k) and the Traditional 401(k) Are Similar

Although fundamentally different, there are some similarities between the two plans, such as:

Ultimately, deciding which 401(k) option is best for you depends on your predicted career and income trajectory as well as your financial situation now and in retirement. Whether you wish to enjoy tax-exempt contributions now, or tax-free withdrawals later in life, it’s good to know what options are available so you can choose the one that is right for you.

Which One Suits You Better — Traditional or Roth 401(k)?

Choosing between a traditional and a Roth 401(k) greatly depends on when you think it would be of greatest benefit for you to pay taxes on your contributions. By paying taxes now, you may benefit if you think you’ll be in a higher tax bracket in the future. However, the risk is that if you end up with a lower income and, therefore, lower tax bracket in the future, you may end up paying more taxes in the long run.

With a Roth 401(k), contributions are taxed now, which will lower your current paycheck more than a traditional 401(k). If your objective is to pay low taxes now because you estimate that your tax rate will go down until retirement, a traditional 401(k) may be best for you.

You might feel like you’re faced with a dilemma if your employer offers both a traditional and a Roth 401(k) and you have to make a choice. Just remember that when choosing between the two, it’s essential to know that choosing a traditional 401(k) means you are postponing your tax payments well into the future. Your future income and tax rates, although partially predictable, are not certain. Career advancement might result in you being placed in a higher tax bracket, but in retirement, that might not matter.

See your traditional 401(k) and Roth 401(k) options at Human Interest. We offer full-service 401(k) plans to small- and medium-sized businesses to improve what they offer to their employees and help them secure their financial future well into retirement. Your company can get a plan that’s perfect for everyone’s needs in just a few minutes with one of Human Interest’s flexible plan options.

The Human Interest Team The Human Interest Team

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.

Small and medium businesses can be prepared, too.

Start a great retirement benefit for less than the cost of one employee’s health insurance.

Human Interest - The 401(k) provider for small and medium-sized businesses

Get free 401(k) resources now. Learn more about 401(k)s for you and your company.

Get free 401(k) resources now. Learn more about 401(k)s for you and your company.