Comparing traditional and Roth 401(k)/403(b) contributions
Both traditional and Roth 401(k) and 403(b)s offer tax advantages. Use this side-by-side comparison of the important features of traditional and Roth accounts to understand your options.
Employers with 401(k) or 403(b) plans aren’t required to offer Roth accounts, so check with your benefits department to find out if the Roth option is offered by your plan.
- Contribution limits
- Employer matching contributions
- Federal income taxes
- Distributions (withdrawals)
- Required minimum distributions (RMDs)
- Loans and hardship withdrawals
- Effects on taxable income
- Options when employment ends
Contribution limits
| Traditional 401(k)/403(b) | Roth 401(k)/403(b) |
|---|---|
| The maximum contribution is $16,500, or $22,000 for participants 50 and older, in 2010. However, plans may set lower limits. | Same as traditional. The limits apply to all contributions combined, whether traditional, Roth or both. |
Employer matching contributions
| Traditional 401(k)/403(b) | Roth 401(k)/403(b) |
|---|---|
| Employer matching contributions are allowed if offered by the plan. Matching contributions are excluded from income when made to the plan and are taxable when withdrawn. | Same as traditional. |
Federal income tax treatment
| Traditional 401(k)/403(b) | Roth 401(k)/403(b) |
|---|---|
| Contributions and earnings are taxable when withdrawn. | Qualified distributions are tax- and penalty-free. (See Distributions below for more details.) |
Distributions (withdrawals)
| Traditional 401(k)/403(b) | Roth 401(k)/403(b) |
|---|---|
|
Distributions are taxable as ordinary income. A 10% early withdrawal penalty may apply on distributions made before you reach age 59 1/2. If employment is terminated after age 55, withdrawals may be penalty-free but are still taxable. |
Qualified distributions are tax- and penalty-free if the first Roth contribution was made at least five years before; and if you are at least 59 1/2 years old, are disabled or have died. For nonqualified distributions, earnings are taxable and may be subject to a 10% early withdrawal penalty. |
Required minimum distributions (RMDs)
| Traditional 401(k)/403(b) | Roth 401(k)/403(b) |
|---|---|
|
You must take required minimum distributions beginning at age 70 1/2 or at retirement, whichever is later. Once withdrawals begin, RMDs must be taken each year. To avoid RMDs during your lifetime, you can roll your account assets into a Roth IRA when you’re eligible to take distributions. You’ll be responsible for any unpaid taxes on the taxable portion of a Roth IRA rollover. Find out how you can defer income taxes on rollovers to Roth IRAs in 2010. |
Same as traditional. |
Loans and hardship withdrawals
| Traditional 401(k)/403(b) | Roth 401(k)/403(b) |
|---|---|
| Plans may allow loans and hardship withdrawals. | Same as traditional. |
Effects on taxable income
| Traditional 401(k)/403(b) | Roth 401(k)/403(b) |
|---|---|
|
Taxable income is used in determining your tax bracket and eligibility for certain benefits, such as tax credits and financial aid. Traditional contributions reduce your taxable income at the time of investment. However, distributions from traditional accounts are taxable as ordinary income in retirement. |
Roth contributions do not reduce your taxable income at the time of investment. However, qualified Roth distributions do not increase your taxable income. |
Options when employment ends
| Traditional 401(k)/403(b) | Roth 401(k)/403(b) |
|---|---|
When leaving your employer, your account balance can be:
|
When leaving your employer, your account balance can be:
|
If you’re trying to decide which option to use, find out why tax rates could be the key.
Read your employer’s summary plan description for details specific to your plan, such as contribution limits and employer matches. You should consult a financial professional or tax professional to find out more about your options.
Return to topInvestors should carefully consider the investment objectives, risks, charges and expenses of the American Funds. This and other important information is contained in each fund’s prospectus and/or summary prospectus, which can be obtained from your plan’s financial professional or downloaded and should be read carefully before investing.