Roth IRA
The Traditional 401K plan came into being in the year 1978 so that employees could contribute their earnings before taxes to their retirement plan. This is also called elective deferral. On the other hand Roth IRA was incepted in the year 1997 and was implemented in the year 1998. Here, the average American who qualified for the plan had to make contributions up to a certain limit after taxes were deducted from the contributions.
When it came to 401K the account holder could begin withdrawing contributions after the age of 59 and half. These distributions are taxed at the income tax rate of ordinary income. There are certain exceptions to withdrawal before 59 and half including not having the job after the age of 55, disability and equal periodic payments.
However, most people were disappointed as ordinary income tax rates were different when they first started out and relatively much more different than when they retired. It clearly was not working for some people.
Roth IRA took a while to get accepted among the masses; however, once it did it quickly became popular and most people converted their traditional IRAs into a Roth IRA. The major benefit in Roth IRA is that the principal amount can be withdrawn anytime without taxes.
Moreover, after 59 and half, even the earnings are not taxed. These taxes are deducted right when the contribution was made. So, the retirement period would be happier without taxes to pay and one would exactly have the idea of how much he would have – easier Math. The cons of Roth IRA are its rigid eligibility structure and substantial penalty on withdrawal of earnings.
So, for some people Roth 401k may still work really well since it keeps them in a low tax bracket upon retirement unlike Roth IRA which has several other benefits.
When it came to 401K the account holder could begin withdrawing contributions after the age of 59 and half. These distributions are taxed at the income tax rate of ordinary income. There are certain exceptions to withdrawal before 59 and half including not having the job after the age of 55, disability and equal periodic payments.
However, most people were disappointed as ordinary income tax rates were different when they first started out and relatively much more different than when they retired. It clearly was not working for some people.
Roth IRA took a while to get accepted among the masses; however, once it did it quickly became popular and most people converted their traditional IRAs into a Roth IRA. The major benefit in Roth IRA is that the principal amount can be withdrawn anytime without taxes.
Moreover, after 59 and half, even the earnings are not taxed. These taxes are deducted right when the contribution was made. So, the retirement period would be happier without taxes to pay and one would exactly have the idea of how much he would have – easier Math. The cons of Roth IRA are its rigid eligibility structure and substantial penalty on withdrawal of earnings.
So, for some people Roth 401k may still work really well since it keeps them in a low tax bracket upon retirement unlike Roth IRA which has several other benefits.
