June 4, 2015
Workers See Regular, Roth 401ks as Same
Due to differing tax treatments, each $1,000 placed into a traditional, tax-deductible 401(k) costs less today than $1,000 placed into a Roth 401(k), but that Roth will provide more money in retirement.
New research indicates that workers don’t recognize this difference between the two types of employer-sponsored retirement accounts when deciding how much to save.
A $1,000 contribution to a traditional 401(k) costs the worker less than $1,000 in take-home pay, because the income tax hit on the $1,000 will be delayed until the money is withdrawn from the account. But a $1,000 contribution to a Roth 401(k) costs exactly $1,000 in take-home pay, because the worker has to pay income taxes on it up front. The Roth funds, including the investment returns, will not be taxed when they’re withdrawn.
A Roth 401(k) might be thought of as shifting additional money into the future, allowing people to spend and consume more in retirement. (This assumes the same tax rate over a worker’s lifetime.)
The upshot: to get a set amount of after-tax money for retirement, workers could contribute less to a Roth than to a traditional 401(k). But that’s not what they do. …Learn More