1) Tax treatment: Contributions to a traditional 401(k) are made with pre-tax dollars, meaning they are not taxed in the year you make them. However, when you withdraw the money in retirement, you'll have to pay income tax on the amount withdrawn. In contrast, contributions to a Roth 401(k) are made with after-tax dollars, meaning you pay taxes on the money before it goes into your account. But when you withdraw the money in retirement, you won't have to pay any taxes on it.
2) Eligibility: Some employers offer both traditional and Roth 401(k) plans, while others only offer one. If your employer offers both, you'll need to decide which one is right for you. However, not everyone is eligible for a Roth 401(k). The IRS has income limits that prevent high-income earners from contributing to a Roth 401(k).
3) Contribution limits: The contribution limits for traditional and Roth 401(k)s are the same. In 2023, the maximum you can contribute is $19,500. However, if you are age 50 or older, you can make catch-up contributions of an additional $6,500 per year.
4) Required minimum distributions: With a traditional 401(k), you must start taking required minimum distributions (RMDs) by April 1 of the year following the year you turn 72. RMDs are calculated based on your account balance and life expectancy, and you'll pay income taxes on the amount withdrawn. With a Roth 401(k), there are no RMDs during your lifetime.
5) Investment options: The investment options available in a traditional and Roth 401(k) can vary depending on your employer's plan. However, both plans generally offer a range of investment options, including mutual funds, index funds, and target-date funds.
