- 401k plans are offered through your employer. It sets up the plan, as well as who can contribute. An advantage to having the employer set up the plan is that it is able to offer matching contributions. This is when your employer puts extra money in your 401k based on how much you contribute. For example, if your employer promises to match your contributions up to $5,000, if you contribute $6,000, your employer adds an additional $5,000.
- Contributions to both the 401k plan and the Roth 401k plan are made by your employer through deductions from your take-home pay. For example, if you decide to contribute $400 per month to either type of plan, your employer would subtract $400 from your monthly paycheck and put it into your retirement account.
- Both the Roth 401k and traditional 401k have the same contribution limits. For 2009, individuals could contribute up to $16,500 to their 401k or Roth 401k plan. If you were older than 50, you were allowed to contribute an additional $5,500, for a total of $22,000.
- Unlike IRAs and Roth IRAs, which have specific adjusted gross income limits, there are no restrictions on who can have a 401k or Roth 401k as long as the program is sponsored by your employer. Even if you are self-employed, you can set up a 401k for yourself. However, companies can limit who can participate to an extent. Workers younger than 21, those who have not been with the company for at least a year, and workers covered under a collective bargaining agreement can be excluded.
- Both plans offer the ability for contributions to grow tax-free. The advantage of a 401k plan is that your contributions to it are tax deductible. For example, if you contribute $3,000 in one tax year, you can deduct $3,000 on your taxes that year. However, 401k plans are taxable when the money is withdrawn. Roth 401k contributions are not taxable, but payouts at retirement are.
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