401k

Traditional 401ks Versus Roth 401ks

As a young adult, saving for retirement is often the last thing on my mind. Though retirement may seem to be ages away, I know those years will be here before I know it! I believe understanding my options when it comes to saving money for my retirement is necessary. It is wise to be prepared and knowledgeable about retirement savings accounts before the time comes to begin saving!

There are a few different options when it comes to retirement accounts, but 401ks are one of the most popular. Many companies offer these plans to their employees. Typically, employees set a percentage of their salary that will be deposited automatically into their 401k. Employers often agree to contribute a set amount to their employee’s accounts, as well. That’s free money, so always take advantage of employer matching. It can increase your retirement savings exponentially.

There are many different types of 401ks. Here are the similarities between Traditional 401(k)s and Roth 401(k)s.

Traditional 401ks

Traditional 401ks are funded through pre-tax dollars. The contributions are taken from a person’s earnings before paying taxes on income from your job. When a person has this type of retirement plan, their taxable income will be lower. But, be wary, for you will have to pay taxes on these contributions when the money is withdrawn from the account during retirement years.

Roth 401ks

Roth 401ks are funded through after-tax dollars. So, the money being put into a Roth 401k has already been claimed in taxes. Therefore, when this money is taken withdrawn from the account during retirement, taxes are already paid.

When it comes down to it, the choice between a Traditional 401k and a Roth 401k depends on a couple of different things: which plan a person’s employer offers and what a person prefers. Some may choose to pay taxes on their retirement funds now, while some may like to wait until they need to utilize said money.

Read more financial tips, see the Today I Learned section of our website.

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Brylee Bergbower is a student at the University of Texas at Tyler studying Kinesiology who is taking on the world, learning about financial matters, and writing about it for Kelly Community. In her spare time Brylee juggles two part-time jobs, spends time with family and friends, stays fit, and studies!