A:

A Roth 401(k) has advantages over a traditional 401(k) for a person who is in a low tax bracket, but expects to be in a higher tax bracket at retirement.

Traditional 401(k) plans are known as "tax-deferred" plans; tax is not paid on contributions but is paid on distributions. Larger employers have traditionally offered 401(k)s as defined contribution plans. There are different annual contribution limits for each type of plan.

Roth Individual Retirement Account plans are not tax-deferred; tax is paid on contributions but is not paid on any distributions. Like traditional 401(k) plans, there are limits on how much can be contributed annually, and Roth IRA contribution limits have been consistently lower than traditional 401(k) plan limits. Roth IRA plans have not been offered as defined contribution pensions from employers, and as such, they have not been eligible for employer matching. Roth IRA plans may have access to a wider range of investment options than traditional 401(k) plans as well.

Enacted by the U.S. Congress and first offered in 2006, Roth 401(k) plans are "basically the opposite" of traditional 401(k) plans. Both types of plans are offered as defined contribution pensions from employers. The offering of a "non-tax-deferred" option for employees was not available previously. Individuals generally pay tax on contributions (there are provisions to combine post-tax and tax-deferred contributions in the same account as well) and receive distributions tax free. An added advantage is that they have followed higher traditional 401(k) contribution limits.

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