The purpose of a 401k plan is to give people the opportunity to effectively save money for when they retire. The system is set up with employers matching 401k contributions their employees make to their plans, which is probably the most attractive part of the 401k process. The other attractive aspect for most people is not being taxed on earnings in the plan until retirement, when the money is withdrawn. This is a positive point for some people, and a negative one for others.
It is the tax that is the main concern for most responsible citizens who are able to save money with their 401k investing and not need it until much later in life. With a 401k retirement plan, the money you earn in your account is not taxed until you withdraw it. The principle here is that people withdrawing from their 401k accounts will likely be retired and therefore in a lower tax bracket than when they were making their money. For some people, though, being taxed when withdrawing funds from their 401k will not be financially advantageous and this has led to many choosing Roth 401k plans.
The Roth plan was created as an alternative to the traditional 401k plan. It works by taxpayers making contributions and paying tax on income earned in that year, meaning the funds consist of after-tax dollars. Once tax has been paid, then of course it does not need to be paid again on the same funds. Therefore, many years down the road when the money is withdrawn, there will be no taxes imposed. This is advantageous for people who expect to be in a much higher tax bracket when they are older and want to use the funds. Paying taxes now would then be the cheaper way to go.
A Roth 401k is not the way to go for individuals currently earning a significant amount of money, and planning to be in a lower tax bracket when they are at retirement age. There are other considerations as well, like the fact that money in a Roth account cannot be moved to a regular 401k account. As well, there are not many employers out there willing to offer Roth plans, due to the extra administration required to offer the standard 401k retirement plans in addition to the Roth ones.
The standard Roth or 401k plan are similar in purpose, in that they are both there to encourage and enable people to save money for their retirement. The differences in how the funds in the accounts are taxed will be the main deciding factor in choosing which plan works best for you. As with most long-term investment strategies, having a mix of different funds will probably result in the best retirement strategy.
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