Individuals who want to save for retirement may have the option to invest in a 401(k) or Roth 401(k) plan. Both plans are named for the section of the U.S. income tax code that created them. Both plans offer tax advantages, either now or in the future.
With a traditional 401(k), you defer income taxes on contributions and earnings. With a Roth 401(k), your contributions are made after taxes and the tax benefit comes later: your earnings may be withdrawn tax-free in retirement.
Traditional 401(k) Plans
A traditional 401(k) is an employer-sponsored plan that gives employees a choice of investment options. Employee contributions to a 401(k) plan and any earnings from the investments are tax-deferred. You pay the taxes on contributions and earnings when the savings are withdrawn. As a benefit to employees, some employers will match a portion of an employee’s 401(k) contributions. Income taxes on matching funds also are deferred until savings are withdrawn.
Roth 401(k) Plans
An employer-sponsored Roth 401(k) plan is similar to a traditional plan with one major exception. Contributions by employees are not tax-deferred but are made with after-tax dollars. Income earned on the account, from interest, dividends, or capital gains, is tax-free.
401(k) and Roth 401(k) Rules and Regulations
The Securities and Exchange Commission does not regulate or oversee retirement plans such as pensions or 401(k) plans.
If you have a question about your retirement plan, please contact:
U.S. Department of Labor
Employee Benefits Security Administration
200 Constitution Avenue, NW, Room N5623
Washington, D.C. 20210
Toll-Free: 1-866-444-EBSA (3272)
Phone: (202) 219-8776
If you have a complaint about your plan, you can learn the procedures for filing a claim on the EBSA website. You can find information about pensions on the EBSA website, and learn how fees and expenses affect the total return you will receive for retirement from your 401(k) plan.
FINRA's Smart 401(k) Investing explains how to enroll in and manage your 401(k) account, and answers questions on eligibility, rollovers, hardship withdrawals, and other topics.