401(k) vs. Roth 401(k) Plans: Which One Should You Choose?

401(k) plans are fairly common at employers throughout the country. They have gradually replaced traditional defined benefit retirement plans. Roth 401(k)s have only been around the past few years, and are far less common. Here's our 401(k) vs. Roth 401(k) quick comparison.

Introduction to Each Plan

401(k) plans are employer-sponsored retirement plans primarily funded through payroll deductions from the employee’s salary. A typical plan includes several investment choices, and the employee can select which vehicles to invest in, as well as the percentage allocation that will be in each. Contributions are tax-deductible to the employee, accumulate earnings on a tax deferred basis, often include a limited employer contribution match, and become taxable upon withdrawal.

Roth 401(k) plans blend the benefits of a Roth IRA with the more generous contribution limits of a regular 401(k) plan. Though there is no deduction for contributions made to the plan by the employee, earnings accumulate on a tax-free basis, but distributions can be withdrawn tax-free. A Roth 401(k) may feature an employer match, but the funds from the match must be placed into the regular portion of the 401(k).

Let’s take a closer look at the specific features of each plan.

Contribution Limits

401(k) — Up to $19,000 ($25,000 if you are 50 or older) per year

Roth 401(k) — Up to $19,000 ($25,000 if you are 50 or older) per year in combination with a regular 401(k)

Income Limits

401(k) — None, though the rules are more complicated in the case of highly compensated employees (HCEs)

Roth 401(k) — Same

Income Tax Considerations

401(k) — Contributions are tax-deductible in the year taken, but earnings in the plan accumulate on a tax-deferred basis. Funds become taxable as ordinary income upon withdrawal.

Roth 401(k) — Contributions are not tax-deductible when made, but earnings accumulate on a tax-free basis. There is no income tax liability on withdrawals from the plan if they are taken after reaching age 59 ½, and as long as the plan has been in existence for at least five years.

Early Withdrawals

401(k) — Withdrawals taken prior to turning 59 ½ are taxable as ordinary income, and subject to an IRS additional tax on early withdrawals equal to 10% of the amount of the distribution.

Roth 401(k) — Contributions made to the plan are not taxable upon withdrawal, since they were not tax-deductible when made. Withdrawal of investment earnings within the plan will be subject to income tax upon withdrawal, as well as the 10% early withdrawal tax penalty.

Loan Provision:

401(k) — 50% of the value of the plan, up to $50,000

Roth 401(k) — Not available

Required Minimum Distributions (RMDs):

401(k) — Required when you reach 70 ½

Roth 401(k) — Required when you reach 70 ½, unless you are still employed

Rollovers:

401(k) — Can be rolled over into the 401(k) plan of the next employer, an IRA, or a Roth IRA

Roth 401(k) — Can only be rolled over into another Roth 401(k) or a Roth IRA

Whatever plan you select, it’s important you get into a retirement plan and start building up your retirement portfolio as soon as possible.