when 401 k plans were first rolled out in the early 1980s companies and their employees had one choice the traditional 401 k 31 then in 2006 roth 401 k s arrived 32 roths are named for former u s senator william roth of delaware the primary sponsor of the 1997 legislation that made the roth ira possible 33
at first roth 401 k s caught on slowly but now many employers offer them so the first decision employees often have to make is choosing between a roth and a traditional 401 k as a general rule employees who expect to be in a lower marginal tax bracket after they retire might want to opt for a traditional 401 k and take advantage of the immediate tax break employees anticipating a higher tax bracket after retiring might choose a roth 401 k to avoid paying taxes on their savings later this decision could be especially worthwhile if the roth has many years to grow as all the money earned by the contributions over decades will be tax free upon withdrawal as a practical matter the roth reduces your immediate spending power more than a traditional 401 k plan that matters if your budget is tight since it s difficult to predict what tax rates will be decades from now many financial advisors suggest putting money into both roth and traditional 401 k accounts 401 k vs brokerage accountbrokerage and 401 k accounts are both investment accounts but they serve different purposes a 401 k is primarily for retirement savings while a brokerage account can be used for various financial goals and offers more control over the investments a 401 k is a type of qualified retirement plan within it you can choose from a menu of investment options generally mutual funds where your money grows in a tax advantaged manner a brokerage account meanwhile is a private account where you can buy sell and hold whatever securities your broker has access to including mutual funds stocks bonds and exchange traded funds etfs brokerage accounts are taxable meaning that your capital gains and dividends are subject to tax in the current period there are also no contribution limits early withdrawal considerations or minimum distributions note that brokers may also offer individual retirement accounts iras which share certain features of both 401 k and individual accounts like a 401 k these retirement accounts grow tax deferred and have annual contribution limits that are lower than those of a 401 k they also require rmds at age 72 but like a brokerage account they are not employer sponsored and you can invest in a range of securities such as stocks bonds and etfs retirement accountemployer sponsoredlimited menu of investment optionstax deferredannual contribution limitsearly withdrawal penaltiesrmdspotential for employee matchingcan be used for anythingself sponsoredcan buy or sell any investmenttaxableno contribution limitsno withdrawal penaltiesno rmdsno matching