- Traditional 401k– Contributions are tax free but distributions at retirement are taxed.
- Roth 401k– Contributions are made with after tax dollars, therefore distributions are tax free.
The advantage of the Roth 401k is that if you need to withdraw a large amount in an emergency, there are no tax consequences. You don’t have to worry about paying any taxes and it won’t boost you up to the next tax bracket as it would for the traditional 401k. I recommend establishing both traditional and Roth retirement plans and begin asap. If you begin contributing to your retirement plans when you are young, you will be set financially when you retire at 67.