What are the benefits of a ROTH 401k?

A ROTH 401k works in a similar way to a regular 401k. Both are retirement accounts and you make contributions to build up a surplus of money that you would like to use for retirement. When you retire you will most likely do a 401k rollover to an IRA.

Smart investing tips for beginners does have some good beginning points if you are looking for a little help getting started with all of the terminology. But, the reason for this post is to talk about the inherent benefits of a ROTH 401k.

Now, many of you may know what a ROTH IRA is, and it works exactly the same way. The differences between the two are the same as the differences between a 401k and a traditional IRA.

The main benefit of a ROTH 401k over a traditional 401k is that when you take the money out of the ROTH account, it is tax free as opposed to having to pay taxes on it. This is a huge advantage if say you started with $40,000 of your own money and the investment grew to $200,000 over 30 years. You basically saved a huge sum on taxes that you didn't have to pay because of this.

There are a few stipulations that you must abide by. First, you have to be over 59 1/2 before you can withdraw money from a ROTH 401k, and you have to have had it for 5 years. Also, any contribution you make to the plan is already taxed, unlike a regular 401k.

So, essentially what happens is that with a regular 401k, you get a tax benefit up front. With a ROTH 401k, you get a benefit on the way out. Both provide great benefits and both will be needed for every person. I always reccomend people start both a ROTH 401k and a regular 401k when they start a new job and just split the contributions down the middle. So, you get both of the benefits in the long run.