What’s the Difference Between a Traditional and Roth 401(k)?

If you work for a company that offers a retirement plan, such as a 401(k) or 403(b), you probably have the option of making "traditional" or "Roth" contributions to your account. While having more investment options is a good thing, it might leave you feeling overwhelmed or confused about the benefits of each. 

Today, I'll review critical points about the differences between a traditional and Roth retirement plan at work. You'll learn who qualifies to participate, how much you can contribute, and how they affect your retirement and taxes.

What is a 401(k) retirement plan?

Only employers can offer a traditional or Roth 401(k) or 403(b) to eligible workers. You may have to reach a certain age, such as 21, or be employed for a period, such as one or six months, to qualify. 

Employers can customize certain features of their retirement plans; however, they must comply with the Employee Retirement Income Security Act of 1974 (ERISA). It's a federal law that sets minimum standards for most workplace retirement plans, which protects participants. Your employer should provide a Summary Plan Description every year, which explains your retirement plan's features and your rights.

There aren't many ways to save for retirement that guarantee a 100% return before you even factor in investment returns!

When you enroll in a 401(k), you authorize your employer to automatically deduct elected contributions from your paycheck and send them to your retirement account. If your company offers matching funds, they contribute additional money for free. 

An example of a typical 401(k) match is 2% or 3% of your compensation. For instance, if your salary is $40,000 a year, 2% is $800. If you contribute that much, so will your employer, giving you a total contribution of $1,600 ($800 from your paycheck plus $800 from your company). And if you can only contribute $500, your employer contributes $500, for a total contribution of $1,000 for the year. There aren't many ways to save for retirement that guarantee a 100% return before you even factor in investment returns! So always be sure to participate in a workplace plan and max out matching funds when offered.

Some retirement plans come with a vesting schedule. It's a period you must remain employed to fully own your matching contributions or other employer-provided funds, such as profit...

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