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Yahoo
7 hours ago
- Business
- Yahoo
Roth 401(k) vs. 401(k): Which one is better for you?
401(k) retirement plans come in two types: traditional and Roth. A traditional 401(k) allows you to contribute pre-tax dollars, offering an immediate tax break. A Roth 401(k) plan allows you to contribute post-tax dollars, so you won't owe taxes when you withdraw from the account in retirement. Each plan offers different advantages. Which one is best for you ultimately depends on your time horizon, individual goals and risk tolerance. The 401(k) plan comes in two varieties — the Roth 401(k) and the traditional 401(k). Each offers a different type of tax advantage, and choosing the right plan is one of the biggest questions workers have about their 401(k) plans. It can be a surprisingly complicated choice, but many experts prefer the Roth 401(k) because you'll never pay taxes on qualified withdrawals. Here are some of the key differences: Traditional 401(k) Roth 401(k) Contributions Contributions are made with pre-tax income, meaning you won't be taxed on that income in the current year. Contributions are made with after-tax income, meaning you won't receive a tax break in the current tax year. Retirement withdrawals Withdrawals at retirement (after age 59 ½) are treated as ordinary income. Withdrawals at retirement are tax-free if you've had the account for at least 5 years. Employer match An employer match may be available. An employer match may be available and is typically treated as a contribution to a pre-tax account. Required minimum distributions Yes, starting at age 73. RMDs are no longer required. Penalties Yes, a 10 percent bonus penalty on the full withdrawal amount may be levied on early withdrawals. Yes, a 10 percent bonus penalty may be levied on any earnings taken through early withdrawals. However, the choice depends a lot on your individual financial situation. Here's what you need to know about each type and why one might be better for your needs. Get started: Match with an advisor who can help you achieve your financial goals The 401(k) is one of the most popular retirement plans around. About 70 million people actively participate in them, holding a collective $8.9 trillion as of September 2024, according to the Investment Company Institute. Their appeal: A 401(k) plan offers a tax-advantaged way to save for retirement, making it easier for you to roll up some dough for the future. Regardless of which plan you choose, 401(k) plans have some things in common. Some of the most important features include the following: Tax breaks for contributing, either now or in the future. A selection of investment funds to purchase. Tax-advantaged growth on your contributions. Maximum annual contributions of $23,500 for 2025, with a $7,500 catch-up contribution for those who are age 50 and older. Potential for employer matching contributions, with your employer kicking in extra money based on your contributions. 10 percent penalties may be assessed for early withdrawal, with penalty-free withdrawals beginning at age 59 ½. Either 401(k) plan helps make investing easy, because they withdraw money from your paycheck and then invest it in your selected funds. Many participants like the ease of investing this way and report that they never miss the money. A traditional 401(k) is the original version of the plan and is usually referred to simply as a 401(k). This type of plan allows you to make contributions with pre-tax dollars so that you don't pay taxes on money you contribute. So your tax break comes today, rather than later. In this 401(k), you'll also enjoy deferred taxes on your investment gains. Your money is taxed only when it comes out of the account. That means you can avoid taxes on earnings, such as capital gains and dividends, until you withdraw them from the account during retirement. A Roth 401(k) is a relatively new addition, and it allows you a different kind of tax break. With a Roth 401(k) you'll make contributions with after-tax money, so you won't enjoy a tax break today. In exchange, any money that you withdraw in retirement will be tax-free. In a Roth 401(k), you'll enjoy not only tax-free growth of your investment gains but also tax-free withdrawals. The reality is that you won't pay taxes on any money that comes out of the account at all. The lone caveat: the withdrawals must occur in retirement, meaning mainly that money has to be withdrawn after you turn age 59 ½, with a few qualified exceptions such as economic hardship, or for qualified first-time homebuyers. One other key difference occurs if you're receiving matching funds for a Roth 401(k), which typically don't go into the Roth portion of the account. 'Employer contributions go toward your pre-tax 401(k) funds,' says Rob Greenman, CFP, at Vista Capital in Portland, Oregon. 'So, by electing an employee Roth contribution, you're getting a mix of both Roth and pre-tax funds.' However, the Secure Act 2.0, which was passed at the end of 2022, now allows for matching contributions to be made in the Roth account, though it may take some time for employers to offer this feature as part of their plans. Keep in mind that if you opt for matching contributions to go into your Roth account, the contributions will be taxed. The question about which 401(k) plan is better depends so much on your individual situation. A Roth 401(k) works well in many cases, but the traditional 401(k) is really good in others. But not knowing the future means you'll have to do some guesswork about where your life will lead. 'With perfect information about our career trajectory, future earnings, and future tax rates, we'd simply be able to model whether contributing to our 401(k) on a pre-tax or Roth basis was best,' says Roger Ma, founder and financial planner at lifelaidout in New York. 'Unfortunately, we don't know any of that information.' However, there are a number of situations where you're better off picking one or the other based on where you are now and what you might expect in the future. 401(k) calculator: Figure out which plan makes the most financial sense for you Here's when the Roth is probably a better option: 'I recommend making Roth contributions when someone is in a low bracket and expecting to later be in a higher tax bracket,' says Mark Wilson, CFP and founder of MILE Wealth Management in Irvine, California. 'If you can pay taxes today at 12 percent to avoid paying taxes in the future at 25 percent, this is a good deal.' Wilson defines a low bracket as being taxed at the federal level of 12 percent or less. 'There are cases where Roths can make sense for folks in higher brackets as long as they are expecting even higher incomes in the future,' says Wilson. Youth is also a big advantage, allowing money to grow tax-free even longer. 'The younger a person is, the more advantage a Roth can have for them, because they have a longer time for the money to grow,' says Edward J. Snyder, CFP and founder of Oaktree Financial Advisors in Carmel, Indiana. 'The younger person is also more likely to be in a lower tax bracket than someone who is mid- to late-career.' Even if you don't expect to earn more, you might expect tax rates across the country to increase, and such a rise could make the Roth 401(k) more attractive today. 'We are experiencing, as a country, some of the lowest tax rates in our history,' says Alex Koury, CFP, of Hosler Wealth Management in Phoenix. 'Considering the massive debt we already have, it is likely in the future tax rates will be higher.' Of course, there's always uncertainty in any projections, especially predicting the political winds. 'The risk is that you may not know your income in the future and you may not know what tax rates will be in the future,' says Marguerita Cheng, CFP and CEO at Blue Ocean Global Wealth in the Washington, D.C. area. If you've already funded a traditional 401(k), it can make sense to add a Roth plan to the mix. It can actually be valuable to not have all your eggs in one retirement basket, even if it does make the most financial sense today. That's because having both plans will offer you flexibility later. 'Having money spread out in both pre-tax and Roth accounts gives 'future you' more flexibility to better control your tax bracket in retirement,' says Ma. 'They will be able to choose to take withdrawals from sources that are pre-tax, like a traditional 401(k), or after-tax like a Roth 401(k),' says Snyder. 'This can help them get more income out of investments and not go into a higher tax bracket.' 'If you only have money in a traditional 401(k), you'll have less flexibility, as withdrawals will be taxed at your marginal tax rate, and you'll be subject to required minimum distributions,' says Ma. 'RMDs can have an impact on the taxation of Social Security benefits and Medicare surcharges,' says Greenman. Exceed certain income thresholds and more of your Social Security check becomes taxable. A mix of accounts can help you avoid this scenario. Both the traditional 401(k) and the Roth 401(k) had required minimum distributions in 2023 (though there are a handful of exceptions), but the Roth allowed you to escape the RMD without any extra taxes. Beginning in 2024, RMDs were no longer required for Roth 401(k) accounts, thanks to the Secure Act 2.0. Here's when the traditional 401(k) plan is probably the better option: Because the traditional 401(k) gives you a tax break on contributions today, it can make sense to use that break today when your tax costs are high. 'If someone is in the highest tax bracket (37 percent), and they think they will be earning less as they approach retirement, then it may make sense to contribute on a pre-tax basis,' says Ma. That's the course of action recommended by Marianela Collado, CFP, at Tobias Financial Advisors in Fort Lauderdale, Florida, but she adds an important stipulation. 'Having said that, even this only makes sense if you are disciplined enough to take the savings associated with making that traditional 401(k) contribution and you save that, too,' says Collado. Collado says that if you're not disciplined enough to invest that tax savings from the traditional 401(k), 'then the tax-free growth [in a Roth] will far outweigh what you could've accumulated in a traditional plan on an after-tax basis.' Some employers don't offer matching contributions for 401(k) plans at all. However, some subset of employers provide this perk for traditional 401(k) plans only — but not Roth 401(k) plans — because of how tax laws benefit these traditional plans. 'Some employers do not match on Roth 401(k) contributions, because they are unable to get the tax benefit,' says Marc Schindler, owner of Pivot Point Advisors in the Houston area. 'If this is the case, the worker can utilize the regular 401(k) to capture the match and then switch to the Roth later in the year.' Using Schindler's strategy, you can still capture the full employer matching — which advisors universally agree is the thing you must do — with early-year contributions to a traditional plan. Learn more: How to build a financial plan for you and your family If you want to take advantage of the benefits of a traditional 401(k) and a Roth 401(k), you can do so. For example, you could make contributions for the first half of the year into the Roth version to take advantage of its tax-free withdrawals in retirement and use the second half of the year to get benefits from the traditional 401(k) plan's tax breaks on contributions. Or you could alternate years, using the Roth plan one year and the traditional plan the next. Either way, your plan's administrator will track and categorize your contributions appropriately for tax purposes. Regardless of which 401(k) plan you choose — or if you choose both — your total contributions in any single year are limited to the annual maximum ($23,500 in 2025, with a $7,500 catch-up contribution for those age 50 and older.) That maximum does not include any employer match on your contributions, however. So the match counts as a bonus above and beyond your own personal contributions. With this employer contribution, the maximum you can put into the account is $70,000 in 2025, plus the $7,500 catch-up for those 50 and over. Is there a downside to a Roth 401(k)? A Roth 401(k) doesn't have major downsides, but it's worthwhile knowing the full story. Generally, early withdrawals from a 401(k) are not permitted, so when your money is there, it's in there for good. That said, the 401(k) does have a few situations — hardship withdrawals — when you can access your money, and sometimes even without a penalty. Your investment options in a 401(k) are also limited to whatever is in your plan, and the investments may be unattractive or charge high fees. Is Roth 401(k) separate from 401(k)? Regardless of whether you contribute to a traditional 401(k), a Roth 401(k) or both, your money is held in the same account. The management company keeps track of which contributions are treated as pre-tax contributions and which are after-tax Roth contributions. Can you convert traditional 401(k) funds to a Roth 401(k)? Yes, you can convert a traditional 401(k) to a Roth 401(k), but it will create a taxable event. Since contributions to a traditional 401(k) were made with pre-tax money, income taxes have never been paid on the contribution. So any pre-tax money that is converted to a Roth 401(k) will create a tax liability, which could be substantial, depending on how much you're converting. You can also work with one of the best brokers for IRAs to convert a traditional 401(k) to a traditional IRA or Roth IRA. The choice between a traditional 401(k) and a Roth 401(k) can depend on a lot of factors that are specific to your individual financial situation. While the experts love the Roth 401(k) for its many tax benefits, you'll have to decide whether that makes sense for your needs and future. — Bankrate's Brian Baker, CFA, contributed to an update of this story.
Bloomberg
11 hours ago
- Business
- Bloomberg
Union Authorizes Strike at Tyson Foods' Beef Plant in Texas
Workers at Tyson Foods Inc. 's beef plant in Amarillo, Texas, have agreed to a strike as they fight for higher wages and accuse the company of unfair labor practices. Members of Teamsters Local 577 voted by a 98% margin to authorize the move, the union said in a statement. The group represents 3,100 workers in slaughtering and processing at the facility, which it says is the largest beef processing plant in the US.
Forbes
12 hours ago
- Business
- Forbes
How To Be Picky About Job Offers - Even In Economic Downtimes
Lots of applying with few nibbles can make us take a desperate grab at the first offer that comes ... More along. But that approach can lead to more headaches in the long run than it's worth. It's one thing to say 'be picky about job offers" in a strong economy, but it's a whole other matter to make that assertion when times are tough. And times sure aren't great now. According to LinkedIn's Workforce Confidence Index, workers' confidence about career prospects during Q2 of 2025 was the lowest its been in over five years. That's even lower than the early pandemic period that was filled with layoffs, uncertainty, and general doom and gloom. Given these findings, and the widespread economic uncertainty that's driving them, the smart thing to do if you're out of work is to take any job that comes along, right? Nope. Even in poor economic moments, a desperate grab at a role tends to result in a 'rinse and repeat' affair, in which you're searching again before you know it. I've seen this time and again for individuals before they start working with me as a career coach. They thought taking any full-time, W2 job was better than nothing, but then were summarily back out searching because the new company went through sudden layoffs, striking first at the lowest people on the totem pole; the org or manager had performance expectations so unrealistic that they were unmeetable; or it was such a miserable work environment that they simply couldn't stand to stay put. Worse yet, they now have a short stint on their record - it will typically show up in background checks, even if they try to hide it on their resume - that they'll need to explain away for years to come. Better to be picky about W2 job offers, albeit reasonably so. First, Be Honest About Your Level of Certainty About the Job Offer It's easy to get overly excited about a job offer, overlooking the concerns we truly have. We get sparkles in our eyes about the prospect of being done with the very painful job search process and truly want to believe it's all going to be great. The very first step in being reasonably picky, for the sake of having a sustainable next job, is to be brutally honest about how certain you are that it's a good fit company and role for you. As I wrote in a recent article on career decision making, we only need to aim for 80% certainty when making choices. That is genuinely high enough to feel like we have made an informed, thoughtful decision without becoming completely paralyzed. So by 'reasonably picky,' I don't mean having sky-high, perfecting expectations, nor having full clarity that it'll be a fit. In order to gauge your certainty: Second, Know What To Ask and Observe Before Accepting a Job Offer In order to make your known unknowns into known knowns, you have to ask the right questions and observe the right elements. What are the 'right' questions and observations? Unfortunately I can't outright tell you. What's 'right' is entirely subjective and depends on what matters most to you at work. Every single coaching client I have had had slightly different questions and priorities about their work, so reflection is key to this part of the process. Some ways to do this: What do you need to know before accepting an offer? Don't be afraid to ask it - once you have the ... More offer Third, Conduct Thorough Research About The Job Offer Of course you can and should ask the hiring manager a lot of questions - that's a typical step before accepting an offer. But don't rely on one person's word! Asking for more information is not cause for rescinding an offer. If they balk at the request to talk with more people and/or to take a few days to consider the offer, that's 'data' for you to consider about the organization and/or the hiring manager's approach. In that case, proceed with real caution. In addition to the hiring manager, consider asking to talk with the following: In addition to asking great questions, don't overlook the role of intentional observation, by which I mean going into post-offer, pre-acceptance settings (e.g., conversations with the hiring manager and/or potential colleagues; a site visit) with a clear list of things you'll watch for. For instance, one of my clients had 'collaboration' very high on her list of values. I asked her how she'd know that was present and she said that in an in-person workspace she'd like to see people physically moving around, talking to one another; that was her specific notion of ideal collaboration. So she requested another site visit to meet her potential colleagues and observed interactions naturalistically while she was there (i.e., what was happening nearby as she talked to someone?). It passed her smell test and she accepted the offer - and is still there many years later! All in all, taking the time to full consider and research a full-time W2 job offer, no matter the economic conditions, is well worth it. It's much more costly - in terms of time, energy, and explaining away a short stint - to accept a bad job offer than it is to wait a bit for a better, long-lasting opportunity to come along.
CTV News
16 hours ago
- CTV News
Moment tractor-trailer strikes utility worker inside raised bucket truck
Watch A utility worker suffered minor injuries after being struck by semi-truck stuck while raised in a bucket working to fix a stop light.
NHK
21 hours ago
- Business
- NHK
Japan's unemployment rate for May holds flat at 2.5%
Japan's internal affairs ministry says the country's jobless rate in May was unchanged from April at 2.5 percent. Data released by the ministry on Friday shows 1.83 million people were out of work, down 100,000 from a year earlier and the fourth straight month of decline. The data also shows 68.38 million people in employment in May, up 720,000 from the same month last year. That's the highest since 1953, when comparable data became available. The number of regular employees rose by 480,000 year-on-year to 37.23 million, the highest since 2013. Ministry officials say they view the employment situation as favorable, but they will continue to closely monitor employment and unemployment trends.
