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. An employer-sponsored Roth 401 (k) plan is similar to a traditional plan with one major exception.
Employee contributions are not subject to deferred taxes, but are made with after-tax money. Accrued account income, for interest, dividends or capital gains, is exempt from tax. The main difference between a Roth 401 (k) and a 401 (k) is when you pay taxes into your employer-sponsored retirement account. With a Roth 401 (k), you contribute money after taxes and can then withdraw it tax-free once you reach retirement age.
A traditional 401 (k) plan allows you to make contributions before you pay taxes, but you'll have to pay income tax on distributions you make in retirement. Since Roth withdrawals are considered tax-exempt income, strategically taking money out of Roth accounts can prevent income from exceeding certain Medicare thresholds. In many cases, a Roth IRA may be a better option than a 401 (k) retirement plan, as it offers more investment options and greater tax benefits. 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.