Like Individual Retirement Accounts(IRA), some 401k plans offer options in the taxation of YOUR 401k contributions.
- ROTH – these contributions allow the employee to report their contribution as taxable income for the current tax year. Because they pay the taxes on the contributions in the current tax year, the future growth may be tax-free and no taxes may be owed upon withdrawal.
- Traditional – these contributions are taken from the gross pay before taxes. They are tax-deferred. The taxes on this money will be paid on the money as it is withdrawn based on the income tax bracket for the employee in the year the money is withdrawn
In plans with both choices, it is up to the employee how much of their own contributions are allocated to the two options. The combination of contributions into both options are subject to the limit levels.
** The employer’s contributions will always be placed in the traditional contribution option.
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