Roth 401k/403b Compared with Traditional Account

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If your employer offers Roth accounts in its 401k or 403b plan, you have a choice to make: you can put all your retirement in a traditional account, all in a Roth account, or split your money between the two. Here's how they compare.

Different tax treatment

Your contributions to a traditional account reduce the amount of income you have to report, and that means a smaller tax bill in the year you made those contributions. You pay the piper later: all your distributions from that account are taxable, so you end up paying tax on your contribution plus all the investment earnings.

Your contributions to a Roth account don't reduce your tax in the year of the contributions, but all the earnings in that account will be tax-free for as long as the account exists. Furthermore, at termination of employment you can roll your Roth 401k or 403b account to a Roth IRA, so the account can continue to grow with tax-free earnings for as long as you choose to preserve it.

No difference in contribution limits

You can contribute just as much to a Roth 401k or 403b account as to a traditional account. Bear in mind that there is a single limit that applies to the overall total you contribute to both types of accounts. If your limit is $15,500, you can put that much in either type of account or split it between the two types, but your total contribution to both types can't be more than $15,500.

No difference in investments

You'll have the same investment opportunities for your Roth account as for your traditional account. Put this fact together with the fact that they have equal contribution limits and you'll see that you can accumulate just as much in a Roth account as in a traditional account.

No difference in matching contributions

If your employer provides matching contributions for retirement savings, you'll get the same match for contributions to a Roth account as you would for contributions to a traditional account. The only hitch is that the matching money has to go into a traditional account.

Example: Your employer provides a 50% match on the first $4,000 of 401k savings. If you contribute $4,000 to a traditional account, your employer will add $2,000, so you'll see a total of $6,000 go into your traditional account. If you choose to contribute $4,000 to a Roth 401k account instead, your employer will put $2,000 into your traditional account. You still get total additions of $6,000 to your retirement savings.