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. If it makes sense for your situation, a conversion to Roth is a great way to take advantage of the tax-free growth of your accounts.
Therefore, using Roth accounts can help you reduce the amount of your Social Security benefits that are taxable by the IRS. 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. If you earn too much to qualify for the Roth IRA, the Roth 401 (k) gives you the opportunity to access Roth's tax-free investment growth. Taking part of your retirement income from a Roth account can reduce your gross income in the eyes of the IRS, which in turn can reduce your retirement expenses.
If you want to learn more about Roth 401 (k), compared to traditional 401 (k) and other investment options, it's a good idea to talk to an investment professional who can help. If you prefer to pay taxes now and get them out of the way, or think your tax rate will be higher when you retire than it is now, choose a Roth 401 (k). Having access to traditional and Roth assets during retirement gives you much greater control over your taxable income each year during retirement, since you can choose which account to use to cover your spending needs in those years. Remember that there are two basic rules you must follow in order to withdraw money from your Roth 401 (k).
With a Roth 401 (k), income taxes only apply to your earnings, since you've already prepaid the money you put into the account. Another reason to consider a Roth 401 (k) is if you expect to be in a higher tax bracket when you retire. There's no one-size-fits-all answer when it comes to transferring your retirement savings to a Roth account. This means that the Roth 401 (k) would be the best option, since you would now pay a lower tax rate (24%) than you would expect to pay when you retire (32%).
Having these two pieces of information can help clarify whether you should contribute to a traditional 401 (k) or a Roth 401 (k).