Certified Financial Planner John Fawaz (left) told Tearsa Smith about Roth IRAs and 401k plans Tuesday on Good Morning Tennessee.-
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KNOXVILLE (WATE) - What is the difference between a traditional 401k savings plan and a Roth Individual Retirement Account? The difference could be significant to your retirement plan, says Certified Financial Planner John Fawaz.
Fawaz says savings in a regular 401k is made pre-tax. That means you don't pay taxes on that money when you deposit it in the savings account. You pay it later, normally when you have retired and are beginning making withdrawals from that account.
The assumption there is that your tax rate will be lower when you retire.
In a Roth IRA, you pay taxes on the money in the year you deposit it into the account. The advantage here is that you only pay taxes on that initial deposit and not on the interest it accumulates in later years.
Fawaz advises that if you are in a high tax bracket the traditional IRA may make more sense for you.
Most people will find the Roth IRA more advantageous, but not as many people make use of it.
