With a Roth 401 (k), the main difference is when the IRS keeps its share. You make contributions to the Roth 401 (k) with money that has already been taxed, just like you would with a Roth Individual Retirement Account (IRA). So all profits grow tax-free and you don't pay taxes when you start withdrawing money when you retire. A Roth account may be more valuable during retirement.
That's because when you take a dollar out of that account, you can put all that dollar in your pocket. When you take a dollar out of a traditional 401 (k) plan, you can only keep the balance after paying distribution taxes. Finally, and this is a bit complicated and not always available, you can sometimes have more access to your funds in a Roth 401 (k) than in a Roth IRA. Like traditional 401 (k) and traditional IRAs, Roth 401 (k) requires you to start accepting distributions at 72.Once you can get used to investing 15% of every paycheck in your Roth 401 (k) right from the start, you won't even miss out on the money you pay in taxes.
The Roth IRA doesn't require minimum distributions, so you can keep that money and transfer the account to your heirs. However, if you have a Roth 401 (k) with mutual fund options in good-growing stocks, you don't need to invest in a traditional 401 (k). A third advantage of a Roth 401 (k) account is the ability to borrow money from the account balance. If you have a lower income period, it can be a great opportunity to convert a traditional 401 (k) into a Roth individual retirement account (IRA) with a lower tax rate.
Remember that there are two basic rules you must follow in order to withdraw money from your Roth 401 (k). So there's no point in contributing to a Roth 401 (k) while you're living in New York City, unless you know you'll be retiring in an area with an equally high tax rate. Since a Roth 401 (k) is an employer-sponsored plan, your choice of investments will be limited to what the corporate structure has decided. However, if you start renewing a Roth IRA account, you have 60 days to use that money at 0% interest before depositing it into your new account, basically, a short-term loan.
There's no one-size-fits-all answer when it comes to transferring your retirement savings to a Roth account. Another reason to consider a Roth 401 (k) is if you expect to be in a higher tax bracket when you retire.