401(k) and Roth 401(k)
Planning for retirement can be complicated. The most common type of retirement plan is a 401(k), a savings plan offered by many employers that offers tax advantages to the employee. With a 401(k), the employee agrees to put a percentage of each paycheck into an investment account, and an employer can match part or all of that contribution. The employee is able to choose from a selection of mutual funds based on their risk tolerance.
401(k)
With the traditional 401(k), contributions are deducted from gross income. This means that the employee’s contributions reduce their taxable income. No taxes are due until the money is withdrawn, typically during retirement.
Roth 401(k)
Conversely, with a Roth 401k, contributions are deducted from after-tax income. No taxes are due when the retirement savings is withdrawn.
