NCEP - very MM: Explain a Roth 401K vs Traditional 401k

[downtoearth]

Okay, so I was doing some retirement benefit training and my HR person didn't do well explaining the difference. I know a Roth 401k comes out taxed, but do I EVER have to pay taxes on the money that grows from that 401K?

[PinkSquirrel]

Roth you pay your taxes when you put the money in, traditional, you pay them when you take money out

[cjeanette]

No you don't pay taxes on it as long at you are 59.5 or have met the 5 year rule- from the IRS site

"What is a 5-taxable-year period of participation? How is it calculated?
The 5-taxable-year period of participation begins on the first day of your taxable year for which you first made designated Roth contributions to the plan. It ends when five consecutive taxable years have passed. If you make a direct rollover from a designated Roth account under another plan, the 5-taxable-year period for the recipient plan begins on the first day of the taxable year that you made designated Roth contributions to the other plan, if earlier.
If you are a reemployed veteran making designated Roth contributions, they are treated as made in the taxable year of qualified military service that you designate as the year to which the contributions relate.
Certain contributions do not start the 5-taxable-year period of participation. For example, a year in which the only contributions consist of excess deferrals will not start the 5-taxable-year period of participation. Further, excess contributions that are distributed to prevent an ADP failure also do not begin the 5-taxable-year period of participation."


Note- if you take out before the 5 years its only the gain that is taxable

[downtoearth]

Thanks PinkSquirrel and cjeanette.  I wish I would have known more about these before b/c I like the idea of having the funds tax free during retirement - at least from now until retirement I can do some Roth and still have some traditional.  However, I'm a MM flunky and even spent the first 8 years of my working life not contributing anything to retirement, which means I feel behind already.  Oh well, at least I like my career and can work into my late 60's if I have to.