{"id":1527,"date":"2022-07-03T12:23:06","date_gmt":"2022-07-03T12:23:06","guid":{"rendered":"https:\/\/wcginc.com\/?p=1527"},"modified":"2026-01-26T16:36:41","modified_gmt":"2026-01-26T16:36:41","slug":"roth-401k","status":"publish","type":"post","link":"https:\/\/wcginc.com\/blog\/roth-401k\/","title":{"rendered":"Roth 401k Versus Traditional 401k"},"content":{"rendered":"

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<\/span>Key Takeaways<\/span><\/h2>\n
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  • Roth 401k vs. Traditional 401k:<\/b> Roth 401k contributions are post-tax, have higher limits, and no income phaseouts, unlike Roth IRAs.<\/span><\/li>\n
  • Contribution limits:<\/b> In 2022, you can contribute $20,500 to a Roth 401k plus $6,500 if 50 or older. Traditional 401k limits are the same, but contributions are pre-tax.<\/span><\/li>\n
  • Wealth-building perspective:<\/b> After-tax (Roth) contributions often build more wealth long-term than pre-tax contributions because taxes are paid upfront.<\/span><\/li>\n
  • IRS \u201cfree loan\u201d concept:<\/b> Pre-tax contributions reduce current taxes, letting you invest the saved taxes now, but the impact may be modest over time.<\/span><\/li>\n
  • State tax strategies:<\/b> Pre-tax contributions can reduce state income taxes now; some retirees may relocate to tax-friendly states later.<\/span><\/li>\n
  • RMD considerations:<\/b> Roth 401k withdrawals are generally tax-free, and 401k RMDs can be delayed if still working and owning \u22645% of the company.<\/span><\/li>\n
  • Recommendation for company employees:<\/b> Split contributions 50\/50 between Roth and pre-tax to balance tax-free growth and tax deferral.<\/span><\/li>\n
  • Recommendation for self-employed:<\/b> Maximize Roth contributions, plus a discretionary pre-tax company contribution to leverage tax deferral benefits.<\/span><\/li>\n<\/ul>\n

    Financial planning:<\/b> Always defer to your financial advisor for personalized strategy and ensure alignment with long-term wealth goals.<\/span><\/p>\n<\/div>\n

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    \"\"Summer is tax planning time and we get a lot of questions about solo 401k contributions, and whether they should be Roth 401k contributions or traditional (pre-tax) 401k contributions. Our general answer is Roth for a few reasons.<\/p>\n

    Before we get into that, let\u2019s review a couple of things. First, when we say Roth 401k we are not talking about Roth IRAs. We truly are talking about a post-tax contribution to a 401k plan. 401k plans and IRAs are totally different.<\/p>\n

    Next, unlike a Roth IRA, a Roth 401k does not have income limits. So, while you might be phased out based on income from a Roth IRA (modified adjusted gross income cannot exceed $214,000 for the 2022 tax year), you can make a zillion dollars and contribute to a Roth 401k.<\/p>\n

    Wait, there\u2019s more! You can contribute $20,500 for the 2022 tax year into a Roth 401k plus another $6,500 if you are 50 or older. This is in stark contrast to a Roth IRA which is $6,000 + $1,000.
    \nMost 401k plans, both solo 401k plans and full-blown big-biz 401k plans, have two \u201caccounts.\u201d One for pre-tax or traditional 401k contributions, and another for Roth 401k contributions.<\/p>\n

    Quick recap- Roth 401k contributions have higher limits and do not have any income phaseouts. Let\u2019s not forget about tax-free growth.<\/p>\n

    So\u2026 Roth or pre-tax\u2026 which do you use?<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t