The 401(k) retirement plan, offered by many employers, comes in two primary flavors: Traditional and Roth. Both have their advantages and specific features. To help you navigate these retirement savings options, here are 10 critical aspects of Traditional and Roth 401(k)s:

1. Tax Treatment on Contributions

• Traditional 401(k): Contributions are made with pre-tax dollars, reducing your taxable income for the year you contribute.

• Roth 401(k): Contributions are made with after-tax dollars. There's no immediate tax deduction, but the trade-off comes with tax-free withdrawals in retirement.

2. Taxation Upon Withdrawal

• Traditional 401(k): Distributions in retirement are taxed as ordinary income.

• Roth 401(k): Qualified withdrawals are tax-free, provided you meet certain conditions.

3. Required Minimum Distributions (RMDs)

• Traditional 401(k): You must start taking RMDs at age 73, as of the 2023, with the passing of the SECURE 2.0 Act, even if you don't need the funds.

• Roth 401(k): RMD rules also apply, but you can roll your Roth 401(k) into a Roth IRA to avoid them.

4. Contribution Limits

Both plans share the same contribution limits. For 2023, the limit is $22,500, with an additional $7,500 catch-up contribution allowed for those 50 or older.

5. Early Withdrawal Penalties

Both plans impose a 10% early withdrawal penalty for distributions taken before age 59½, in addition to regular taxes, with some exceptions like hardship or disability.

6. Employer Matching

Some employers offer a match on your contributions. Their match usually goes into a traditional 401(k) account, even if your contribution is to a Roth 401(k). Hence, the match will be taxable upon withdrawal.

7. Income Restrictions

• Traditional 401(k): There are no income restrictions for participation.

• Roth 401(k): Unlike a Roth IRA, there are no income limits to participate.

8. Loan Provisions

Both plans may allow loans. Typically, you can borrow up to 50% of your vested account balance, up to $50,000. Loans usually must be repaid within five years.

9. Flexibility in Investment Choices

Both the Traditional and Roth 401(k) offer a range of investment options selected by the employer, typically including a variety of mutual funds spanning different asset classes.

10. Estate Planning Considerations

• Traditional 401(k): Heirs will have to pay income tax on any inherited funds they withdraw.

• Roth 401(k): Heirs can take distributions tax-free, making it a potentially more valuable asset to pass on.

Conclusion:

Choosing between a Traditional and Roth 401(k) requires careful consideration of your current financial situation, your anticipated retirement needs, and your tax outlook. Both offer distinct advantages. Consider speaking with a financial planner or tax advisor to determine which option aligns best with your long-term goals.