Author: Nikki Brown – Corporate Director of Accounting
Roth 401(k) vs. Traditional 401(k): What’s the Difference?
Planning for retirement is one of the most important steps you can take to secure your future. At Harmony Hospitality, Inc. we’re proud to offer a company-sponsored 401(k) plan with both Traditional and Roth options. While both help you save for retirement, they work differently when it comes to taxes. Understanding these differences can help you choose the option—or combination—that best fits your goals.
1. How Contributions Are Taxed
- Traditional 401(k): Your contributions are taken before taxes, which lowers your taxable income today. You’ll pay taxes on your contributions and earnings when you withdraw them in retirement.
- Roth 401(k): Your contributions are made after taxes, so they don’t reduce your current taxable income. However, withdrawals in retirement are tax-free (as long as you meet eligibility requirements).
2. How Withdrawals Are Taxed
- Traditional 401(k): All withdrawals are taxed as ordinary income in retirement.
- Roth 401(k): Withdrawals of contributions and earnings are tax-free if you are at least age 59½ and have had the account for at least five years.
3. Required Minimum Distributions (RMDs)
- Traditional 401(k): You must start taking RMDs at age 73, even if you don’t need the funds.
- Roth 401(k): Also subject to RMDs, but you can roll your balance into a Roth IRA to avoid them.
4. Which Option Is Best for You?
Traditional 401(k) may be a good choice if you:
- Want to reduce your taxable income now
- Expect to be in a lower tax bracket when you retire
Roth 401(k) may be a good choice if you:
Want the peace of mind of tax-free withdrawals in retirement
Expect to be in a higher tax bracket later
