With the new Roth 401(k) option, your plan now offers you more flexibility when saving for retirement. In general, a Roth 401(k) is similar to the popular Roth IRA — with most of the same benefits Roth IRAs provide.

With a Roth 401(k), you make after-tax contributions to your 401(k) plan. In other words, your Roth 401(k) contributions are taxed in the year you contribute them to the plan. However, when you retire, you receive your contributions plus any plan earnings on your money tax free.

With traditional 401(k) deferrals, you don’t pay any taxes on your contributions up front, but you pay taxes on both contributions and any earnings when you take the money out of the plan.

So, you have a choice of paying taxes on your retirement money now or paying them later.

The Big Question

Why would anyone choose to pay taxes now rather than later?

The answer for some people: to have more after-tax income when they retire. Depending on your situation, making after-tax Roth 401(k) contributions now can mean more money in your pocket during retirement.